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“A STUDY ON WORKING CAPITAL MANAGEMENT AT NAGARJUNA
HERBAL CONCENTRATES LTD, IDUKKI”
MAJOR PROJECT REPORT
Submitted to
UNIVERSITY OF CALICUT
In partial fulfillment of the requirement for the award of the Degree of
MASTER OF BUSINESS ADMINISTRATION
Submitted by
PRIYAN.C
(REG. NO: LCAMMBA099)
IV SEMESTER MBA (2012-14)
LEAD COLLEGE OF MANAGEMENT –DHONI, PALAKKAD
Under the guidance of
DR.JESSY GEORGE
ASSOCIATE PROFESSOR
LEAD COLLEGE OF MANAGEMENT, PALAKKAD
MAY 2014
DECLARATION
I hereby declare that the project report entitled “A Study on working capital management at
Nagarjuna Herbal Concentrates Ltd Idukki” submitted to University of Calicut for the partial
fulfillment of Master of Business Administration is a record of original work done by me under
the guidance of Dr. Jessy George, Associate Professor, LEAD COLLEGE OF MANAGEMENT
during the academic year 2012-2014.
The empirical findings in the report are based on data collected by me while studying and preparing
this project report.
Place: PRIYAN.C
Date: Reg. No. LCAMMBA099
ACKNOWLEDGMENT
I would like to express sincere gratitude and reverence to God Almighty, for guiding me
throughout this project, making my endeavor an undiluted success.
With great pleasure, I am presenting this project entitled a study on “ A study on working capital
management at Nagarjuna Herbal Concentrates Ltd Idukki” project of this dimension would
not have been possible without the sincere help and earnest support provided to me from all sources
that was approached.
My most sincere thanks to Mr. M. UNNIKRISHAN HR manager of Nagarjuna Ltd for their
kind hearted co- operation, direction and assistance in spite of their busy schedule which has helped
me a lot in completing this report successfully.
I wish to express my deep sense of gratitude to Dr. JESSY GEORGE, Associate Professor at
LEAD COLLEGE OF MANAGEMENT, for her kind support, advice and encouragement from
the beginning of the project work till the completion of the project report and he has been very co-
operative and without his valuable advices and suggestions this report would not have been
successful.
My hearty thanks to our principal Dr. K.V UNNINARAYANAN and all teaching and non-
teaching staffs for providing me with all the facilities in completing this report.
In course of completion of the project I was fortunate to receive the assistance of many faculty,
friends and relatives who were extremely generous with their time and energy, I would like to
thank all of them and recognize the fact that without them this project would have been
inconceivable.
PRIYAN C
LCAMMBAO99
TABLE OF CONTENTS
CHAPTER CONTENT PAGE NO.
CHAPTER – I 1.0 INTRODUCTION 1-2
1.1 INDUSTRY PROFILE 3-6
1.2 ORGANIZATION PROFILE 7-22
1.3 STATEMENT OF THE PROBLEM 23
1.4 OBJECTIVE OF STUDY 23
1.5 RESEARCH METHODOLOGY 23
1.6 SCOPE AND SIGNIFICANCE OF STUDY 24
1.6 LIMITATIONS OF STUDY 24
CHAPTER – II 2.0 REVIEW OF LITERATURE 25-49
CHAPTER - III 3.0 DATA ANALYSIS AND DATA
INTERPRETATION
50-76
CHAPTER – IV 4.0 FINDINGS 77-78
4.1 RECOMMENDATIONS 79
4.2 CONCLUSION 80
BIBLIOGRAPHY
ANNEXURE
LIST OF TABLES
TABLE
NO.
PARTICULARS
PAGE
NO.
3.1 TABLE SHOWING CURRENT RATIO 57
3.2 TABLE SHOWING QUICK RATIO 58
3.3 TABLE SHOWING CASH RATIO 59
3.4 TABLE SHOWING INVENTORY TURNOVER RATIO 60
3.5 TABLE SHOWING DEBTORS TURNOVER RATIO 61
3.6 TABLE SHOWING DEBTORS COLLECTION PERIOD 62
3.7 TABLE SHOWING SOLVENCY RATIO 63
3.8 TABLE SHOWING FIXED ASSET TURNOVER RATIO 64
3.9 TABLE SHOWING WORKING CAPITAL TURNOVER
RATIO
65
3.10 TABLE SHOWING CREDITORS TURNOVER RATIO 66
3.11 TABLE SHOWING CREDITORS PAYMENT PERIOD 67
3.12 TABLE SHOWING CURRENT ASSET TURNOVER RATIO 68
3.13 -3.16 TABLE SHOWING SCHEDULE OF CHANGES IN
WORKING CAPITAL
69-72
3.17 TABLE SHOWING TREND ANALYSIS OF CURRENT ASSET AND CURRENT LIABILITY
73
3.18 TABLE SHOWING TREND ANALYSIS OF WORKING
CAPITAL AND NET SALES
74
3.19 TABLE SHOWING TREND ANALYSIS OF NET PROFIT 75
3.20 TABLE SHOWING TREND ANALYSIS OF NET SALES 76
LIST OF CHARTS
CHART
NO.
PARTICULARS PAGE NO.
3.1 CHART SHOWING CURRENT RATIO 57
3.2 CHART SHOWING QUICK RATIO 58
3.3 CHART SHOWING CASH RATIO 59
3.4 CHART SHOWING INVENTORY TURNOVER
RATIO
60
3.5 CHART SHOWING DEBTORS TURNOVER
RATIO
61
3.6 CHART SHOWING DEBTORS COLLECTION PERIOD
62
3.7 CHART SHOWING SOLVENCY RATIO 63
3.8 CHART SHOWING FIXED ASSET TURNOVER
RATIO
64
3.9 CHART SHOWING WORKING CAPITAL TURNOVER RATIO
65
3.10 CHART SHOWING CREDITORS TURNOVER RATIO
66
3.11 CHART SHOWING CREDITORS PAYMENT PERIOD
67
3.12 CHART SHOWING CURRENT ASSET
TURNOVER RATIO
68
3.17 CHART SHOWING TREND ANALYSIS OF
CURRENT ASSET AND CURRENT LIABILITY
73
3.18 CHART SHOWING TREND ANALYSIS OF WORKING CAPITAL AND NET SALES
74
3.19 CHART SHOWING TREND ANALYSIS OF NET PROFIT
75
3.20 CHART SHOWING TREND ANALYSIS OF NET
SALES
76
CHAPTER 1
INTRODUCTION
1.0 INTRODUCTION
The working capital of an organization is the life blood which flows through the arteries
and veins. It gives courage and morale to the brain (management) and the muscles (personnel). It
digests to the best degree, the raw materials used by its constant and regular flow and returns to
the heart (cash flow) for another journey. Hence, when working capital is lacking or slow, the
financial bodies have value only as a junk. Funds are needed for short term purposes viz., for
purchase of raw materials, payment of wages and other day-to-day business expenses. Many a
time, in the event of a failure of a business concern, the shortage of working capital is given out at
its main cause. But in ultimate analysis it may be the mismanagement of resources of the firm that
could have converted otherwise successful business, became an unsuccessful one.
A firm can exist and survive without making profits but cannot survive without working
capital funds. Working capital has acquired a great significance and sound position for the twin
objects of “profitability and liquidity”. It consumes a great deal of some increase profitability as
well as to maintain proper liquidity at minimum risk. So, the effective management of working
capital is the primary means of achieving the firm’s goal of adequate liquidity, which helps to
measure the degree of production against problems that might cause a shortage of funds.
Essentially, the efficient management of working capital, the minimization risk in the repayment
of its sources of finance, thereby is contributing to maximization of firm’s value. Working capital
is a financial metric which represents operating liquidity available to a business, organization, or
other entity, including governmental entity. Along with fixed assets such as plant and equipment,
working capital is considered a part of operating capital. Net working capital is calculated as
current assets minus current liabilities
The basic goal is working capital management is to manage current assets and current
liabilities of a firm in such a way that a satisfactory of optimum level of working capital is
maintained. A managerial accounting strategy focusing on maintaining efficient levels of both
components of working capital, current assets and current liabilities, in respect to each other.
Working capital management ensures a company has sufficient cash flow in order to meet its short-
term debt.
This project is a study on working capital management. The main aim of this study is to
provide valuable suggestion regarding working capital managing efficiency on the basis
company’s last 5 year financial records The study would analyze the working capital management
policy of the company, the ways in which it maintains balance between the magnitude of working
capital and general scale of operation of the company and to determine with reference to the
appropriate levels of components of current assets maintained and pattern of financing them. In
order to analyze the working capital management the study also intends to analyze the financ ia l
soundness of the firm and operational efficiency of the firm. For the purpose the long term
solvency is also given due importance with that of liquidity.
The present study on working capital management at NAGARJUNA HERBAL
CONCENTRATES LTD IDUKKI enables the firm to efficiently manage its working capital
components and achieve the value of the firm through proper management of working capital.
1.1 INDUSTRY PROFILE
Ayurveda is an ancient health system of India, thought to have originated in the Vedic times
around 5000 years ago. Ayurvedic formulations use combinations of a selection of around 1200
species about 500 of which are commercially traded. Ayurveda uses medicinal plants in various
forms, some of which can be gathered only by destructive harvesting: in 30 per cent cases only the
roots are used, in another 13 per cent only the bark and it is only in about 16 per cent that the whole
plant is used. In other cases, medicines use the fruits, leaves, flowers, rhizome, seeds etc. It is
commonly thought that medicinal plants are mainly herbs, but in fact about one-third are trees—
this has implications for conservation and management of supplies to the industry. The majority
of plants used in Ayurveda are procured from the wild, though around 10 per cent are cultivated
on private lands.
Ayurveda has a 70 per cent share in the formal medicine market in the country. There are
around 6,000 licensed units and an equal number of unlicensed units manufacturing ayurvedic
drugs. The origin of most of these companies can be traced back to a Vaidya (a practicing
Ayurveda expert) who used to prepare some formulations for dispensing. The gradual acceptance
of these medicines led to the growth of such units.
The presence of a large number of small, unorganized micro-manufacturing units and
pharmacies makes it very difficult to estimate the overall turnover of the industry, but rough
estimates put it at around Rs. 45 billion for the year 1998.
The demand for ayurvedic formulations is increasing both in the domestic market as well
as internationally. According to some estimates, the domestic sales are growing at an annual rate
of 20 per cent while the international market for medicinal plant-based products is estimated to be
growing at 7 per cent per annum.
Now we find a much organized and commercial production of Ayurveda medicines in found in
big factories. Ayurveda and its products are becoming popular with increasing demand the world
over. The pressure of the people of the respective countries to adopt Ayurveda products have
amounted to many countries now allowing and regularizing sale of these products in to their
countries. This has boosted the globalization process. But this initial phase is primarily of enquiry
and curiosity Ayurveda has to live up to the expectations, otherwise we have the risk of getting
washed out forever. Hence, Ayurveda needs immediate and extensive reorientation to gain
scientific credibility as this traditional old system of medicine if given the opportunity, is poised
for an unprecedented expansion globally. Therefore there is a need to transform Ayurveda in to a
dynamic, scientifically validated and evidence based which takes its roots from rich knowledge
base of oral tradition and scriptures. The major hurdle in the wider acceptability of Ayurveda and
its products is the lack of proper standardization techniques and its unpreparedness to accept global
challenges. The quality of raw drugs used in manufacturing as well as the finished drugs of
Ayurveda and other traditional systems from India are seen with a suspicion. we need to reassure
our global partners by providing them evidence of quality of medicines we prepare in terms of
reproducible efficacy and standardization.
Some of the reasons for their unpreparedness are:
Lack of good teachers and good institutions of learning. Barring a few like Banaras Hindu
University (Varanasi), Gujarat Ayurveda University and National Institute of Ayurveda,
most of the other colleges are either just average or even below the acceptable limits. This
reflects in non- promising Ayurvedic graduates coming out of these institutions.
Absence of a basic manufacturing standards or standard operating procedures (SOPs) of
various ayurvedic products in this sector.
Absence of adequate scientific documentation is probably the fundamental problem and
most serious limiting factor faced by this sector from the very beginning Problem
confronted by exporters of Ayurveda products is the absence of herbal monographs in
Indian Pharmacopoeia. The lack of a killer instinct in the Ayurvedic industry to have a
larger share of Sales in the domestic as well as in the international market have resulted in
loss of opportunities, which should rather have been grabbed not only for the benefit of the
industry but also for the benefit of the nation as whole.
The lack of facilitating regulations for the Indian medicinal products in the most of the countries
has been the major hindrance for the growth of this sector. There is a strong need to rectify the
things at home as well as in terms of standardizing Ayurvedic finished products on quality
parameters which involve the FPS (Finished Product Specifications), the claim support studies
whether clinical or experimental and the safety of these preparations through toxicity studies done
in NABL/GLP Laboratories as the requirement may be .Even the manufacturing environment has
to be par excellence as many of the authorities like MHRDA, USFDA have the inspection and
approval of manufacturing locations as an essential element of registration .There has been a
gradual change in the attitude although much slower than the time demands. Government of India
has started the task of finalizing the Ayurvedic Pharmacopoeia of India (API) of which Volume I
Part-VI has already been published which covers around 326 herbs. The API gives specifica t ions
of the raw herbs standards to be adopted by the industry.
Much more difficult is the need to identify at least one biologically active marker
compound. Unless and until you have the bioactive marker, no pharmacokinetic studies or
bioavailability studies are possible. This is a challenge as it has also come as an obstacle for the
registration of Ayurveda product as medicines in most of the countries. Professionals of Ayurveda
often blame the industry for not selling its goods abroad as medicines and get the products
registered as food supplements. But till you meet the drug norms, you cannot register them as
medicinal products or drugs.
Authentic substitutes are important for classical products as number of herbs is not
available today and many more are already categorized as ‘endangered species’. If offic ia l
substitutes are not given, the industry will have to shut down shop or has to give false ingred ient
lists. There has to be review commodities specifically for declaring the official substitutes. Besides
laying down the standards of raw materials, the AYUSH Department has also commenced a
programmer to lay down standard for herbal extracts with the help of ISM industry. Industry is
fully cooperating with the Governments to evolve the standards of extracts of both types, viz. water
and hydro-alcoholic extracts of medicinal plants. Facilities of testing the raw materials as well as
the finished products have to be made available to the small manufactures who cannot afford
expensive research laboratories .This can be done either by a consortium of ayurvedic industry or
by the initiatives of the Governments of India. This is all the more important as smaller Ayurvedic
industries cannot afford to have in –house facilities for testing and product development.Contact
research and other facilitating agencies need to be encouraged by providing them with single
window clearances. Financial assistance for contract research organizations (CROs) and research
laboratories exclusively working for Ayurvedic industry also need to be assisted financially for the
promotion of indigenous systems which have till date been ignored. The research going on in
Ayurvedic colleges, Ayurvedic institutes and other allied disciplines like Pharmacy colleges ,
Chemistry departments , Medical colleges; all need to be reviewed by one single agency and the
best of the researchers need to be published in indexed journals. All these university researchers
may not have been the best ones but for sure will give leads in many areas of health care the
Ayurveda industry which is still in infancy will be discouraged to grow.
The industry is not against any regulations, but bringing in regulations one after the other
in quick succession keep a very small window for the industry to operate. What was unregulated
for 73 centuries should be regulated in a phased manner. Some of the stalwarts in industry put this
as the foremost reason for the non- starter of Ayurvedic industry’s growth. Exports certification of
Ayurveda and other herbal products by the government agencies has been a long pending demand
of the industry. This will increase the credibility of the Ayurvedic industry abroad. Even the local
certifications for the domestic market will be wonders for the manufacturer as well as in winning
the confidence of the consumer. Therefore, it is time for the Government, academicians and
researchers in Ayurvedic and allied disciplines to join hands to meet the common goal of having
evidence based Ayurveda.
1.2 COMPANY PROFILE
Nagarjuna Herbal Concentrates Ltd is a public limited company engaged in the production
and marketing of all kind of Ayurvedic medicines and popularizing the indigenous system of
medicines in our country, is located at Thodupuzha. The construction of the company started in
the year 1985, and commissioned in October 1989.In the beginning company has only 87 agencies
but now the authorized agencies are more than 930 and it is spreading throughout the state. At
present there are 1000 direct employees and 2000 indirect employees. The company has a product
range of 650 medicines.
Within 16 years commercial production commenced in 1986 Nagarjuna Herbal
concentrates Ltd was become the second largest Ayurveda house in Kerala, with a turnover of 20-
25 cores continuously making profit since 1991 and declaring dividends regularly for the last 15
years. The company’s loan and interest payment so prompt that is has won the admiration of
financial institutions that support it.Nagarjuna Herbal Concentrates Ltd is also the first corporate
house in the ayurvedic sector in Kerala. It is also having the certification of ISO 9001-2000.the
company provides employment to over 1200 persons directly and indirectly. Nagarjuna state-of-
the-art of manufacturing facilities are located at Alakode, 6km from Thodupuzha in the Idukki
district of Kerala where traditional values and strict adherence to ancient Ayurveda texts as the
law. This place has proximity to the Western Ghats, which has abandon resources of herbal
plants.The production facilities are streamlined to incorporate the modern technology to have the
benefits of accuracy, hygiene and speed in mass production supervised by experts to ayurvedic
wisdom as well as by knowledgeable engineers.The venture has active participation from the
Kerala state industrial development corporation, Kerala financial corporation and the industr ia l
development bank of India. The company is promoted by Sri.V.G.Devadas Namboothirippadu,
first time entrepreneur with financial support from the financial institutions KSIDC and IDBI.
An innovative Research and Development division with a 70 lakh research laboratory and
an ever vigilant quality control section ensures that the Nagarjuna products are of the best quality
and true to the Ayurvedic stipulations. These products numbering over 500 are distributed all over
Kerala through a network of 800 franchisees which have the unique features of having the service
of ayurvedic doctors to attend to the needs of the patient consumers in the outlets.
The company has not limited its operations to the boundaries of Kerala alone, but has
extended to 17 states outside Kerala. The main areas of operations are Karnataka, Tamilnadu,
Andhra Pradesh, Goa, Delhi, Maharashtra, Gujarat, U.P, M.P, Rajasthan, Orissa and Uttaranchal.
Nearly 150 franchisees with service of doctors and quality medicine are already operating in
outside Kerala.
A sister concern of Nagarjuna Research is a charitable institution which is currently
implementing an ambitious programme for promoting the cultivation of Ayurvedic medical plants
and trees, as there cannot be Ayurveda without them. In the few years, lakhs of medicinal plants
have been planted under ages of the foundation.
Nagarjuna is a paradigm shift among Ayurvedic companies in that Nagarjuna was the first
corporate House in the Ayurvedic sector in Kerala as against the family owned Ayurvedic
organizations. Beginning commercial production in 1986, Nagarjuna has today notched up a pre-
eminent position among frontline Ayurvedic companies, marketing a broad spectrum of Ayurvedic
medicines and has achieved commendable sales with national & international presence.
COMPANY MISSION
Nagarjuna Ayurvedic Group was established with the mission of restoring Ayurveda as a
mainstream health management system. In fulfilling this mission, Nagarjuna is at the forefront of
Ayurvedic resurgence by providing pioneering leadership in the manufacture of quality ayurvedic
medicines, establishing health care centers and specialty clinics and formulating meaningful
directions in research in Ayurveda.
Rejuvenating mind and body in harmony with nature is the mission in health care
management system. Train to improve traditional values and strictly adhering to time tested texts.
Nagarjuna herbal concentrates also tries to creating public awareness about the Ayurveda and
promoting herbal cultivation.
COMPANY VISION
“To be the best solution provider in health care through Ayurveda”
To be the best service provider in healthcare through Ayurveda. In translating this vision into
reality, its approach bring-out about a synthesis of tradition and modernity. All that Nagarjuna does is rooted
in the traditional values and principles of Ayurveda, and at the same time fulfills the requirement of modern
ethos, particularly in convenience and form. This is how Nagarjuna positions itself in the mind of the
customer. Nagarjuna Ayurvedic group a leading name in Ayurveda is limited by the vision to provide a
new lease office through quality medicines which include a range of proprietary products to a state of the
art facility that follows traditions of the ancient Ayurvedic test while meeting modern standards of hygiene
and purity. Nagarjuna through its quarterly magazine NAGARATNA said that medicine is neither your
friend nor your enemy you can make it’s neither.
THE’FIRST’
Nagarjuna has several first to its credit. Some of these are;
The first to create synergy between Ayurveda & Ashtavaidya schools of thought in Ayurveda.
The first to take the franchise model of business to service health needs, on a wide scale, across the
state of Kerala, particularly to the rural areas.
The first to provide consistent focus on R&D activities in Ayurveda sector in Kerala and to establish
fully fledged facility for the same.
The first to create wide spread awareness of medical plants among people and to make its
cultivation a popular as well as income generating programmed.
The first to use modem promotional methods such as TV Advertising on a large scale to propagate
Ayurveda.
OBJECTIVES OF THE COMPANIES
They carry on the business of the manufacturing, processing, formulating and distribution of
Ayurvedic Medicines. The main objectives of the company are as follows;
To undertake service of Ayurvedic treatment centers.
To cultivate medical herbs, shrubs and trees.
To make publication based on Ayurvedic texts.
To promote charitable organization for popularizing awareness about Ayurvedic.
Comprehensive, multi-feed development of Ayurveda in all its varied aspects and
expensive propagations of its message.
EXPORTS
Narguna’s overseas presence is in countries such as UK, USA, Switzerland, Holland, Australia,
Italy, UAE, Singapore, West Indies, Hungary, Bahrain, Russia, and Saudi Arabia
PROMOTER OF THE COMPANY
Promoter – Sri.V.G. Devdas Namboodiripad
COMPETITORS INFORMATION
The main competitors against Nagarjuna Herbal concentrates are the following;
Kottackal Arya Vaidhya sala.
Vydyaratnam Ayurveda pharmacy
Kerala Ayurveda pharmacy
Sitaram Ayurveda pharmacy
SD Pharmacy
There is a severe competition between the above all firms with Nagarjuna Herbal concentrates Ltd
to overcome and for the existence the NHCL has various strategies and policies. It includes many
production strategies, sales or marketing strategies, sales promotion strategies etc…
AWARDS & RECOGNITIONS
GREEN LEAF Accreditation, the highest recognition from Kerala Government for centers
providing traditional treatments with modern facilities and ambience.
BEST TREATMENT CENTRE AWARD for 2003-2004 declared by Government in the
form of an award.
THE HIGHEST TESTIMONIAL, however, is from the visitors to the center, particular ly
from the west. Scores of them visit every year, some of them who have visited 4 years in
succession.
ISO CERTIFICATE, Nagarjuna Herbal Concentrates Ltd, has received the ISO 9001:2000
certification. The certificate has been issued by INTERTEC Quality Registrar
International.
ORGANISATIONAL HIERARCHY OF NAGARJUNA HERBAL CONCENTRATES
LTD
Manage
r (QC)
Manage
r
(R&D)
Chemis
t
Productio
n
Manager
Producti
on
Officer
Producti
on
Controll
er
Supervis
or
Marketi
ng
Manager
Kerala
Regiona
l
Manager
Executiv
e
GM
Marketi
ng
Manager
Marketi
ng
(outside)
Executiv
e
C.E.O
Managing Director
Executive Officer
Asst
.
MG
R
Personn
el
Officer
HR
Executi
ve
GM HR
AGM
HR
Legal
Adviso
r
Manage
r (QC)
GM
Finance
AGM
Finance
Asst.
Manager
Senior
Commerci
al Officer
Commerci
al Officer
PRODUCT PROFILE
Nagarjuna is an oldest follower of the Ayurvedic tradition. But modern technology has its
own contributions to be made by way of hygiene, accuracy and speed. So the company’s
manufacturing operation has been mechanized to a large extent. These operators are organized
under the supervision of doctors and health scientists and also Nagarjuna made a determined entry
into the area of patent formulations.
The R & D division of Nagarjuna has evolved strength testing procedure for its drugs. A
significant development recently is the establishment of a modern laboratory set up of a cost of
Rs.70 lakhs. The laboratory has an on-going program of basic research in Ayurveda, besides
development of new formulation and standardization of drugs. Nagarjuna has more than 500
products, which can be classified as follows:
A. Traditional Medicines
The important traditional medicines of Nagarjuna are:
Arishtams
Asavams
Oils
Kuzhambus
Ghruthams
Lehyams
Tablets
Avathis
Choornams
Kashayams
Kashaya choornams
B. Patents proprietary medicines
The important patents proprietary medicines of Nagarjuna are:
Cardostab Tablet
Gason
Haematone
Halin
Nagarjuna Eladasamoola Lehyam
Nutral tablets
7.Rheumat Balm
Smrithi Granules
The important products of Nagarjuna Herbal Concentrates Ltd. include:
Traditional Medicines
The important traditional medicines of Nagarjuna are:
(a)Kashayams
Disintegrated drugs are concentrated and extracted into water. The drugs are boiled in water and
are concentrated. Kashayams produced by Nagarjuna Herbal Concentrates Ltd. are
Amruthotharam kashayam
Aaragwadham kashayam
Balaguloochyaadi kashayam
Dasamooladuthrayam kashayam
Dasamoolam kashayam
(b)Kashaya Choornams
Kashayachoornam is a dry mixture of coarsely powdered raw materials used for the kashayam.
Kashaya Choornams are
Amruthotharam kashaya choornam
Aaragwadham kashaya choornam
Balaguloochyaadi kashaya choornam
Dasamooladuthrayam kashaya choornam
Dasamoolam kashaya choornam
(c) Kashayam capsules
Kashayam capsules are capsule form of Kashayams which can be used instead of Kashayams.
Some of the Kashayam capsules produced by the company are
Balajeerakaadi
Dhanwantharam
Mahaamanjishtaadi
Kallyaanakam
(d)Aavarthies
Aavarthies come under the category of medicated oil. Here the selected quantity of oil is being
medicated by adding medicines repeatedly.
The process of medication is repeated to 7, 14, 41 or 101 times. This enhances the potency of oil.
The products coming under this category are:
Dhanwamtharam Aavarthi 101
Ksheerabala Aavarthi 101
(e)Arishtams
Self-fermented preparations using Kashayams are called Aristams. These are fermented
decoctions of medicines prepared by adding honey, jiggery, sugar and the powder of some
medicines including spices. Such preparations have alcohol content within a range of 6-10% which
is generated because of fermentation itself.
Important arishtams prepared by Nagarjuna are as follows.
Abayarishtam
Amrutharishtam
Asokarishtam
Balakrishtam
Dasamoolarishtam
(f)Asavams
Asavams are fermented preparations produced by adding honey, jaggery, sugar juices and the
powder of some medicines including spices. These preparations have alcohol content at a range of
6-10% which is generated as a result of fermentation. Some of the asavams are as follows.
Aravindasavam
Bhringarajasam
Chandanasavam
Kanakasavam
Kumaryasavam
Lohasavam etc.
(g)Ghrutham
Ghrutham are medicated preparations of ghee. Ghee is medicated by adding decoction, powder,
juice etc. and is processed until the ghee becomes medicated add water free.
Bhrami ghrutham
Gulguluthiktaka ghrutham
Indukaanda ghrutham
Jaathyadi ghrutham
Phalasarpis etc.
(h) Thailams
These are medicated oils. Decoction juice, milk etc. is added to oils like sesame soil, coconut oil
or castor oil and is heated with powdered raw drug, until the water content evaporates completely.
In this process, the medicinal extracts of the raw drugs make the oil medicated.
Amrutbaadithailam
Arimedhas thailam
Baiaadhaathryadi theism
Brahmee thailam
Balaaguioochuaadi thailam
(i)Kuzhambu
These are only for external application, unique to Kerala. A mixture of sesame oil, ghee and castor
oil substitutes oils base of medicines for external application. Important products are:
Balaaswagandhaadi Kuzhambu
Dhanwantharam Kuzhambu
Eladadi Kuzhambu
Kaarpasathyaadi kuzhambu etc
(j) Lehyams
Lehyams are semi solid preparation of drug, prepared with the addition of jiggery or sugar candy
and boiled with the prescribed liquid and fine powder of drugs, until the correct constituency is
obtained.
Agashtya Rasayanam
Ajamamsa Rasayanam
Amruthaprasa Rasayanam
Dasamoola Rasayanam
Gomoothra Harithaki etc.
(k)Gulikas
These are pills or tablets. Common mode of use is grinding and mixing the tablet in suitable
kashaya or any other additives.
Dasaangam gulika
Dhanwantharam gulika
Kanchanaara gulgulu gulika
Shaddharanam gulika
Siva gulika etc.
(l)Choornams
These are fine powders of herbal medicines.
Ashta choornams
Elaadigana choornams
Hinguvachaadi choornams
Raasnadi choornams
Thaaleespathraadi choornam
Ethical Proprietary Medicines
Nagarjuna developed a basket of proprietary or patented products keeping in mind the daily house
consumptions. These products are in convenient forms such as capsules, tablets, granules, syrups,
gels and ointments to facilitate immediate consumption.
These new formulations, however, do not represent a radical change from tradition in their essence
and efficacy. At the same time, they cater to the present day requirements related to the taste of
the medicine and dosage, reducing the unpleasant taste of their traditional variants as well as
minimizing the dosage.
(a)Cardostab Tablet
Effective in hypertension due to any cause.
(b)Gason
It is a strong anti-flatulent drug.
(c)Haematone
Ideal medicine for splenetic and hepatic disorder
(d)Halin
Effective for common cold, nasal congestion and sinusitis.
(e)Nagarjuna Eladasamoola Lehyam
For all kind of cough, sore throat and dyspnea
(f)Nutral Tablets
For gas trouble, indigestion etc
(g)Rheumat Balm
External application in rheumatic pains
(h)Smrithi Granules
It improves the normal brain functions, Excellent in improving memory,grasping power,
intelligence and thinking power especially in children.
(i)Thaleespathraadi tablets
Effective for cough, distaste, spruce and sore throat.
MARKETS
When considering the market for the organization, it has got sales all over Kerala and in most of
the part of India, but a major part of their income from sales come from exports.The different
countries to which Nagarjuna mainly exports are
Russia
Malaysia
Arab Countries
U. S. A.
U. K.
The products sent to these countries vary with their requirements and also with their licensing
agreements.
INFORMATION ABOUT THE IMPORTANT DEPARTMENTAL HEADS
The various functions of the organization will depended on the basis of the size of the business.
The organization structure of the NHCL, Thodupuzha consist of nine major departments. All these
departments comes under the Thodupuzha branch. Most of the departmental heads are supported
by senior managers. The major departments of NHCL are;
Human resource department
Purchase department
Research & development department
Quality control department
Production department
Sales department
Marketing department
Finance department
Maintenance department
FINANCE DEPARTMENT
Finance is the life blood of every business enterprise, because in the modern money
oriented economy finance is the basic foundation of all kind of economic activities. It is the master
key it has rightly been said that business need money to make more money. However it is also true
that money we gets more money only when it is properly managed. Hence efficient management
of every business enterprise is closely linked with efficient management of finance.
Functions of Finance Department
Preparation and maintenance of accounts related document and records
Recording the bank transaction
Maintenance of commercial accounts and income tax
Payment the all company bills like, telephone, electricity, sales tax and CST& VAT.
Auditing
The company has an efficient external auditor. The statutory auditors appointed
by the company law board audits the accounts and records of the company. After completing the
audits, the copy of the report will be sent to the Account General Trivandrum and also presented
before the shareholders. The important audits in Nagarjuna are:
Internal Audit
Statutory Audit
Audit of Controller and Audit General of India
Budget
The budget is prepared and presented to the Board of Director during January or February
of each year. It is prepared on the basis of sales projection provided by marketing department. Raw
materials requirement will be estimated on the basis of comparison with previous year’s figures.
Records Maintaining
Journal book
Cash Book, Bank Book
General Ledger
Asset Register, Salary Register
Purchase Journals, Sales Day book, Creditors Ledger
Subsidiary Registers like, TA Advance, Salary Advance, Medical Advance, Festival
Advance.
1.3 STATEMENT OF THE PROBLEM
The present study is an attempt to diagnose the working capital management of NAGARJUNA
HERBAL CONCENTRATES LTD IDUKKI. Working Capital Management is concerned with
the problems that arise in attempting to manage the current assets, the current liabilities and
interrelationship that exist between them. When discussion was held with concerned authority the
company is keen to know the present working capital position of the company hence the study was
conducted with respect to working capital management of NAGARJUNA HERBAL
CONCENTRATES LTD IDUKKI.
1.4 OBJECTIVES OF THE STUDY
Primary Objective:
To study and evaluate the working capital management of Nagarjuna Herbal Concentrates
Ltd Idukki
Secondary objectives:
To study the liquidity position of the company. And to analyze the profitability of the
company.
1.5 RESEARCH METHODOLOGY
Research Design
Type of research used in the study is partially analytical and partially descriptive. The
major purpose of descriptive research is description of state of affairs of the institution as
it exists at present. Analytical in the sense that analyzing the Effectiveness of working
capital management of Nagarjuna Herbal Concentrates Ltd Idukki
Collection of data
Secondary data:-The study is done on the basis of secondary data it is collected from already
published sources are like annual report of the company, company website and text books
Period of study
Study has been conducted for a period of 45 days
Statistical tools used
The tools used for working capital analysis of Nagarjuna Herbal Concentrates Ltd Idukki
Ratio analysis
Schedule of changes in working capital.
Trend analysis.
1.6 SCOPE AND SIGNIFICANCE OF THE STUDY
The entire study is conducted in order to improve the working capital management in Nagarjuna
Herbal Concentrates Ltd Idukki. The study have contributed mainly to the management by helping
to the financial planning, budgeting and control in the performances of a company. It is especially
valuable in providing information for finances and other departments. The study involves the
purpose of analyzing and interpreting the working capital management of Nagarjuna Herbal
Concentrates Ltd Idukki.
1.7 LIMITATION OF THE STUDY
The major part of the study was concerned with financial data. Adequate data was not
available because of the secrecy maintained by the company.
The study reveals the findings for the present situations only and will not reflect the future
Time was the main constrain
CHAPTER 2
REVIEW OF LITERATURE
2.0 REVIEW OF LITERATURE
Working Capital - Literature Survey
Every business needs funds for two purposes basically; they are for establishment and to
carry day-to-day operations. Long term funds are required for establishment of the organizat ion,
it is required for production facility through purchase of fixed assets and it needs fixed capital.
Short term funds are needed for the purchase of raw materials, payment of wages, payment of day
today expenses etc. The funds required for these short term purposes are known as working capital.
Many researchers have studied working capital from different views and in different environments.
The following ones were very interesting and useful for our research
Pass C.L., Pike R.H (1984)1, studied that over the past 40 years major theoretical developments
have occurred in the areas of longer-term investment and financial decision making. Many of these
new concepts and the related techniques are now being employed successfully in industr ia l
practice. By contrast, far less attention has been paid to the area of short-term finance, in particular
that of working capital management. Such neglect might be acceptable were working capital
considerations of relatively little importance to the firm, but effective working capital management
has a crucial role to play in enhancing the profitability and growth of the firm. Indeed, experience
shows that inadequate planning and control of working capital is one of the more common causes
of business failure.
Herzfeld B (1990)2, studied that “Cash is king”--so say the money managers who share the
responsibility of running this country's businesses. And with banks demanding more from their
prospective borrowers, greater emphasis has been placed on those accountable for so-called
working capital management. Working capital management refers to the management of current
or short-term assets and short-term liabilities. In essence, the purpose of that function is to make
certain that the company has enough assets to operate its business. Here are things you should
know about working capital management.
Samiloglu F.and Demirgunes K (2008)3, studied that the effect of working capital management
on firm profitability. In accordance with this aim, to consider statistically significant relationships
between firm profitability and the components of cash conversion cycle at length, a sample
consisting of Istanbul Stock Exchange (ISE) listed
Appuhami, Ranjith B (2008)4, studied impact of firms' capital expenditure on their working
capital management. The author used the data collected from listed companies in the Thailand
Stock Exchange. The study used Schulman and Cox's (1985) Net Liquidity Balance and Work ing
Capital Requirement as a proxy for working capital measurement and developed mult ip le
regression models. The empirical research found that firms' capital expenditure has a significant
impact on working capital management. The study also found that the firms' operating cash flow,
which was recognized as a control variable, has a significant relationship with working capital
management.
Hardcastle J (2009)5., studied that Working capital, sometimes called gross working capital,
simply refers to the firm's total current assets (the short-term ones), cash, marketable securities,
accounts receivable, and inventory. While long-term financial analysis primarily concerns
strategic planning, working capital management deals with day-to-day operations. By making sure
that production lines do not stop due to lack of raw materials, that inventories do not build up
because production continues unchanged when sales dip, that customers pay on time and that
enough cash is on hand to make payments when they are due. Obviously without good working
capital management, no firm can be efficient and profitable.
Thachappilly G (2009)6., “Working Capital Management Manages Flow of Funds”,(2009)
describes that Working capital is the cash needed to carry on operations during the cash conversion
cycle, i.e. the days from paying for raw materials to collecting cash from customers. Raw materials
and operating supplies must be bought and stored to ensure uninterrupted production. Wages,
salaries, utility charges and other incidentals must be paid for converting the materials into finished
products. Customers must be allowed a credit period that is standard in the business. Only at the
end of this cycle does cash flow in again
Beneda, Nancy; Zhang, Yilei (2008)7, studied impact of working capital management on the
operating performance and growth of new public companies. The study also sheds light on the
relationship of working capital with debt level, firm risk, and industry. Using a sample of init ia l
public offerings (IPO's), the study finds a significant positive association between higher levels of
accounts receivable and operating performance. The study further finds that maintaining control
(i.e. lower amounts) over levels of cash and securities, inventory, fixed assets, and accounts.
Dubey R (2008)8., studied The working capital in a firm generally arises out of four basic factors
like sales volume, technological changes, seasonal , cyclical changes and policies of the firm. The
strength of the firm is dependent on the working capital as discussed earlier but this working capital
is itself dependent on the level of sales volume of the firm. The firm requires current assets to
support and maintain operational or functional activities. By current assets we mean the assets
which can be converted readily into cash say within a year such as receivables, inventories and
liquid cash. If the level of sales is stable and towards growth the level of cash, receivables and
stock will also be on the high.
McClure B (2007)9., “Working Capital Works” describes that Cash is the lifeline of a company.
If this lifeline deteriorates, so does the company's ability to fund operations, reinvest and meet
capital requirements and payments. Understanding a company's cash flow health is essential to
making investment decisions. A good way to judge a company's cash flow prospects is to look at
its working capital management (WCM). Cash is king, especially at a time when fund raising is
harder than ever. Letting it slip away is an oversight that investors should not forgive. Analyzing
a company's working capital can provide excellent insight into how well a company handles its
cash, and whether it is likely to have any on hand to fund growth and contribute to shareholder
value.
Gass D (2006)10., studied "Cash is the lifeblood of business" is an often repeated maxim amongst
financial managers. Working capital management refers to the management of current or short-
term assets and short-term liabilities. Components of short-term assets include inventories, loans
and advances, debtors, investments and cash and bank balances. Short-term liabilities include
creditors, trade advances, borrowings and provisions. The major emphasis is, however, on short-
term assets, since short-term liabilities arise in the context of short-term assets. It is important that
companies minimize risk by prudent working capital management.
Maynard E. Refuse (1996)11, Argued that attempts to improve working capital by delaying
payment to creditors is counter-productive to individuals and to the economy as a whole. Claims
that altering debtor and creditor levels for individual tiers within a value system will rarely produce
any net benefit. Proposes that stock reduction generates system-wide financial improvements and
other important benefits. Urges those organizations seeking concentrated working capital
reduction strategies to focus on stock management strategies based on “lean supply-chain”
techniques.
Thomas M. Krueger (2005)12, studied distinct levels of WCM measures for different industr ies,
which tend to be stable over time. Many factors help to explain this discovery. The improving
economy during the period of the study may have resulted in improved turnover in some industr ies,
while slowing turnover may have been a signal of troubles ahead. Our results should be interpreted
cautiously. Our study takes places over a short time frame during a generally improving market.
In addition, the survey suffers from survivorship bias – only the top firms within each industry are
ranked each year and the composition of those firms within the industry can change annually.
Eljelly (2002)13 empirically examined the relationship between profitability and liquidity, as
measured by current ratio and cash gap (cash conversion cycle) on a sample of 929 joint stock
companies in Saudi Arabia. Using correlation and regression analysis, Eljelly [9] found significant
negative relationship between the firm's profitability and its liquidity level, as measured by current
ratio. This relationship is more pronounced for firms with high current ratios and long cash
conversion cycles. At the industry level, however,he found that the cash conversion cycle or the
cash gap is of more importance as a measure of liquidity than current ratio thataffects profitability.
The firm size variable was also found to have significant effect on profitability at the industry
level.
Lazaridis and Tryfonidis (2004)14, conducted a cross sectional study by using a sample of 131
firms listed on the Athens Stock Exchange for the period of 2001 - 2004 and found statistica l ly
significant relationship between profitability, measured through gross operating profit, and the
cash conversion cycle and its components (accounts receivables, accounts payables, and
inventory). Based on the results analysis of annual data by using correlation and regression tests,
they suggest that managers can create profits for their companies by correctly handling the cash
conversion cycle and by keeping each component of the conversion cycle (accounts receivables,
accounts payables, and inventory) at an optimal level.
Raheman and Nasr (2004)15, studied the effect of different variables of working capital
management including average collection period, inventory turnover in days, average payment
period, cash conversion cycle, and current ratio on the net operating profitability of Pakistani firms.
They selected a sample of 94 Pakistani firms listed on Karachi Stock Exchange for a period of six
years from 1999 - 2004 and found a strong negative relationship between variables of working
capital management and profitability of the firm. They found that as the cash conversion cycle
increases, it leads to decreasing profitability of the firm and managers can create positive value for
the shareholders by reducing the cash conversion cycle to a possible minimum level.
Garcia-Teruel and Martinez-Solano (1996)16., collected a panel of 8,872 small to medium-
sized enterprises (SMEs) from Spain covering the period 1996 - 2002. They tested the effects of
working capital management on SME profitability using the panel data methodology. The results,
which are robust to the presence of endogeneity, demonstrated that managers could create value
by reducing their inventories and the number of days for which their accounts are outstanding.
Moreover, shortening the cash conversion cycle also improves the firm's profitability.
Falope and Ajilore (2003)17 used a sample of 50 Nigerian quoted non-financial firms for the
period 1996 -2005. Their study utilized panel data econometrics in a pooled regression, where
time-series and cross-sectional observations were combined and estimated. They found a
significant negative relationship between net operating profitability and the average collection
period, inventory turnover in days, average payment period and cash conversion cycle for a sample
of fifty Nigerian firms listed on the Nigerian Stock Exchange. Furthermore, they found no
significant variations in the effects of working capital management between large and small firms.
Kouma Guy, (2001)18 in a study on, “Working capital management in healthcare”, Working
capital is the required to finance the day to day operations of an organization. Working capital may
be require to bridge the gap between buying of stocked items to eventual payment for goods sold
on account. Working capital also has to fund the gap when products are on hand but being held in
stock. Products in stock are at full cost, effectively they are company cash resources which are
out of circulation therefore additional working capital is required to meet this gap which can only
be reclaimed when the stocks are sold (and only if these stocks are not replaced) and payment for
them is received. Working capital requirements have to do with profitability and much more to
do with cash flow.
Mehmet SEN, Eda ORUC (2005)19 in the study “Relationship between the efficiency of
working capital management and company size”, As it is known, one of the reasons which
cause change in working capital from one period to another is the change in management
efficiency. The change in management efficiency will affect the change in working capital in a
way as increaser or reducer from on period to another. In this study, the effect of change in
management efficiency in working capital management in to the change in working capital is
compared by company size and sectors. The data of this study covers sixty periods as the total of
quarterly financial statement of 55 manufacturing companies which were in operation in Istanbul
Stock exchange (ISE) between the years 1993 and 2007. In every period we studied, for invento r ies
short term commercial receivables and short term commercial liabilities, and calculated the effect
of change in management efficiency on to the effect of working capital change. In all sectors
considered, in the change in working capital, and observed the effect of reducing of efficiency in
inventory management. It is also observed that efficiency change in the management of the short
term commercial receivables and the short term commercial liabilities by the company sizes and
sectors make a positive effect in to the change in working capital
Brealey, R., (1997)20 in a study on, “Working Capital management concepts work sheet
university of phoenix”. Concept application of concept in the Simulation reference to concept in
reading cash conversion cycle cash conversions is the process of managing a company’s cash
inflows and outflows. In the simulation, the finance manager was responsible for balancing sales
with collections or accounts receivables (cash inflows) and purchases with payments or accounts
payables (cash outflows). This delicate balance maintains the company’s balance sheet keeping
the cash and loans in a situation of financial stability and keeping the money from being tied up.
Principles of corporate finance. Working capital management. New York: McGraw-Hill.
THEORETICAL BACKGROUND
A business enterprise requires not only fixed assets but also current assets for its
efficient functioning. Current assets are required to make effective utilization of fixed assets.
The amount invested in fixed assets is called fixed capital (long term). The amount invested in
current assets is known as working capital (short term). Thus the business enterprise requires
two type of capital, namely, fixed and working capital.
WORKING CAPITAL MANAGEMENT
Working capital management involves the relationship between a short term liabilities. The
goal working capital management is to ensure that a firm is able continue its operations and
that it has sufficient ability to satisfy both maturing short term debt and upcoming
operational expenses. The management of working capital involves managing inventor ies,
account receivables and account payables and cash
MEANANG AND DEFINITION OF WORKING CAPITAL MANAGEMENT
According to smith, “working capital management is concerned with the problems that arise in
attempting to manage the current assets, current liabilities and the interrelationship that exist
between them, It involves both formulating working capital policy and carrying policy in day-
today operations. The objectives of working capital management are twofold (1) maintaining of
working capital and (2) availability of sufficient funds at the time of needed
Working capital management ensures a company has suffic ient cash flow in order to meet its short-
term debt obligations and operating expenses.
IMPORTANCE OF WORKING CAPITAL
No business can run successfully without adequate amount of working capital. The main
advantages of maintaining adequate amount of working capital are as follows:
Adequate working capital helps in maintaining solvency of the business by providing the
uninterrupted flow of production.
Sufficient working capital enables a business concern to make prompt payment and hence
help in increasing and maintaining goodwill.
A concern having adequate working capital, high solvency and good credit standing can
arrange loans from bank and other on easy and favorable terms.
Adequate working capital also enables concern to avail cash discount on the purchase and
hence it reduces cost.
It helps to ensure regular supply of raw materials.
Only concerns with adequate working capital can exploit favorable market conditions.
Adequate working capital enables a concern to exploit favorable market conditions.
Adequate working capital enables a concern to face business crisis in emergencies such as
depression.
Sufficiency of working capital enables a concern to pay quick and regular returns on
investment.
Adequacy of working capital creates an environment of security, confidence, and high
morale and creates overall efficiency in a business.
ADVANTAGES OF WORKING CAPITAL MANAGEMENT
The firm can avail of the cash discount facilities offered by the suppliers.
It enhances the liquidity, solvency and creditworthiness of the concern.
It is possible to meet unseen contingencies and successfully sail through the periods of
crisis.
It improves the morale of the executives.
Good relations with banks can be maintained.
It is possible to utilize fixed assets fully.
It enables to undertake research, innovation and expansion programmers.
It increases profitability of the business.
CONCEPTS OF WORKING CAPITAL
1) Gross concept
2) Net concept
1) Gross concept
According to gross concept working capital refers to the amount of funds invested in current assets.
Thus working capital is equal to total current assets. The working capital as per the gross concept
is called gross working capital. This concept used by the management to evaluate the current
working capital position and to ensure the optimum investment in individual in current assets.
Gross concept is a quantitative concept
Advantages of gross working capital concept:
This concept is helpful in determining the correct amount of working capital at the right
time.
It helps in planning and control of individual current assets.
It helps to maximize the return of investment
It helps in fixation of financial responsibility
1) Net concept
According to net concept, working capital refers to excess of current assets over current liabilit ies.
To be more clearly, working capital is equal to total current assets minus total current liabilit ies.
Thus working capital refers to net current assets. The working capital as per net concept is called
net working capital .the net concept is a qualitative concept because it establishes a relationship
between current assets and current liabilities.
Advantages of net working capital concept
It measures the firm liquidity.
It enables the creditors and investors to assess the short term solvency of the firm.
It indicates the extent to which working capital can be financed with long term funds.
It is an indicator of the financial soundness of an enterprise.
APPROACHES FOR FINANCING WORKING CAPITAL
There are two approaches to financing the working capital;
1) Conventional approach
2) Operating cycle approach
According to accounting technology, “it is the difference between the inflow and outflow of fund”.
1) Conventional approach
This approach aims at ensuring neither idle funds nor shortage of funds. According to this
approach, cash inflow and out flow are estimated before hand and a firm attempt is made to match
them with each other. If cash inflow and outflow are matched then the firm will not have any idle
cash but at the same time it will be able to discharge the liabilities on due date. This approach
advocates the effective management of individual components current assets and current liabilit ies.
2) Operating cycle approach
This approach is more dynamic. It attempt to manage working capital in a realistic way. Under
this approach, working capital is referred to that part of the investment of a business which helps
it to carry out its normal operations by facilitating the use of fixed assets and facilities. The length
of the operating cycle is a function of the nature of business. There are
Four components of operating cycle of a manufacturing concern
The cycle start with the acquisition of raw material and other input for cash
Conversion of raw material and other input into finished goods
Storage of finished goods until finished goods are sold
Collection of cash and account receivable
According to the operating cycle approach, the larger is the duration of an operating cycle, the
larger is the working capital requirement. Therefore, increasing the profitability and efficiency,
financial management should make efforts to reduce the length of operating cycle, as far as
possible.
COMPONENTS OF WORKING CAPITAL
The working capital management has mainly three components ;
1) CASH MANAGEMENT
2) RECEIVABLE MANAGEMENT
3) INVENTORY MANAGEMENT
1) CASH MANAGEMENT
Cash is a starting point and finishing point of any business. Cash is a non-earning asset. It
contributes nothing. Therefore a firm should keep only adequate cash, neither more nor less.
Cash management simply refers to the management of cash that is cash inflows. It is the process
of forecasting, collecting, disbursing, investing and planning for the cash a company needs to
operate its business smoothly. Good cash management can improve financial results. But it can’t
make a weak business strong. On the other hand, bad cash management can make a strong
company weak to the point of failure.
2) RECEIVABLE MANAGEMENT
Receivables result from credit sale. A concern is required to allow credit in order to increase
its sales volume. It is not always possible to sell goods on cash basis only. Receivables
management is the process of making decisions relating to investment in trade debtors. The
investment in receivable is necessary to increase the sales and profit of the firm. But at the same
time investment in this asset involves cost consideration also. Further there is always a risk of debt
too. Thus the objective of receivables management is to take a sound decision as regard investment
in debtors.
3) INVENTORY MANAGEMENT
Every enterprise needs inventory for smooth running of its activities. It serves as a link between
production and distribution process. The investment in inventories constitutes the most significant
part of current assets. The purpose of inventory management is to keep the stock in such a way
that neither there is over stocking nor under stocking. The over stocking will mean a reduction of
liquidity and starving of over production process, under stocking on other hand, will stoppage of
work. The investment in inventory should be kept in reasonable limits. Inventory management
may be defined as the overall way a company manages its inventory against cost. Although the
finance department doesn’t itself manage the firm’s inventory, it has a responsibility to ensure that
the inventory is being managed effectively and efficiently.
SOURES OF WORKING CAPITAL
SOURCES OF FIXED WORKING CAPITAL
1) Shares
2) Debentures
3) Public deposit
4) Part of profit
5) Loan from financial institutions
SOURCES OF VARIABLE WORKING CAPITAL
1) Commercial banks
2) Indigenous banks
3) Trade creditors
4) Advances
5) Deferred income
6) Installment credit
7) Accrued expense
FACTORS DETERMING THE WORKING CAPITAL REQUIRMENT:
The working capital requirements of a concern depend upon a large number of factors such
as nature and size of the business, the characteristics of their operations, the length of production
cycle, the rate of stock turnover and the state of economic situation. However the following are
the important factors generally influencing the working capital requirements.
1. NATURE OR CHARACTERSTICS OF A BUSINESS
The nature and the working capital requirement of enterprises are interlinked. While a
manufacturing industry has a long cycle of operation of the working capital, the same would be
short in an enterprises involve in providing services. The amount required also varies as per the
nature, an enterprises involved in production would require more working capital then a service
sector enterprise.
2. MANAFACTURE PRODUCTION POLICY
Each enterprises in the manufacturing sector has its own production policy, some follow
the policy of uniform production even if the demand varies from time to time and other may follow
the principles of demand based production in which production is based on the demand during the
particular phase of time. Accordingly the working capital requirements vary for both of them.
3. OPERATIONS:
The requirement of working capital fluctuates for seasonal business. The working capital
needs of such business may increase considerably during the busy.
4. MARKET CONDITION:
If there is a high competition in the chosen project category then one shall need to offer
sops like credit, immediate delivery of goods etc. for which the working capital requirement will
be high. Otherwise if there is no competition or less competition in the market then the working
capital requirements will be low.
5. AVABILITY OF RAW MATERIAL
If raw material is readily available then one need not maintain a large stock of the same
thereby reducing the working capital investment in the raw material stock. On other hand if raw
material is not readily available then a large inventory stocks need to be maintained, there by
calling for substantial investment in the same.
6. GROWTH AND EXAPNSION
Growth and Expansions in the volume of business result in enhancement of the working
capital requirements. As business growth and expands it needs a larger amount of the working
capital. Normally the needs for increased working capital funds processed growth in business
activities.
7. PRICE LEVEL CHANGES
Generally raising price level requires a higher investment in the working capital. With
increasing prices, the same levels of current assets needs enhanced investments.
CONCEPT OF WORKING CAPITAL
There are two possible interpretations of working capital concept:
(a) Balance sheet concept
(b) Operating cycle concept
There are two interpretation of working capital under the balance sheet concept. It is represented
by the excess of current assets over current liabilities and is the amount normally available to
finance current operations. However, sometimes working capital is also used as synonym for gross
or total current asset .In that case, the excess of current asset over current liabilities is called Net
working capital or net current asset. Economists like Mead , Malott , Baker , and field support the
gross concept .They feel that current asset should considered as working capital as the whole of it
helps to earn profit and the management is more concerned with the total current asset as they
constitute the total fund available for operational purposes . On the other hand, economists like
Lincoln and Sailors uphold the net concept .They argue that in the long run, what matters is the
surplus of currents asset over
Current liabilities. It is this concept, which helps creditors and investors to judge the financ ia l
soundness of the firm .The contingencies of the firm is met by the excess of current assets and the
net concept helps to explain the financial position of the firm.
Working capital is really a part of long-term finance locked in and used for supporting current
activities. Consequently, the larger the amount of working capital so derived, greater the
proportion of long term capital sources siphoned off to short term activities . It is difficult to say
whether it is right or wrong .Apparently, when firms are warned about tight working capital
situation, the logic of the above definition would perhaps indicate the diversion of long- term
finances for short-term purposes.
OPERATING CYCLE CONCEPT
A company’s operating cycle consists of three activities: purchasing resources, producing
the product and distributing the product. These activities crate funds flows that are both
unsynchronized and uncertain. They are unsynchronized because cash disbursements usually take
place before cash receipts. They are uncertain because future sales and costs,
Which generate the respective receipts and disbursements, cannot be forecasted completely .If the
firm is to maintain liquidity and function properly; it has to invest in various short-term assets
during this cycle. It has to maintain a cash balance to pay the bills as they come due .In addition,
the company must invest in inventories to fill customers’ orders promptly. Finally, the company
invests in accounts receivables to extend credit to its customers.
Operating cycle = inventory conversion period + receivables conversion period
Inventory conversion period = Average inventory
Cost of sales/365
Receivables conversion period = Account receivables
Annual credit sales/365
FACTORS INFLUENCING WORKING CAPITAL
The type of products manufactured
The length of operating cycle
The sales level
Inventory policy
Credit policies
Efficiency in managing current assets
WORKING CAPITAL MANAGEMENT
Working capital management is the process of planning and controlling the level and the
mix of the current assets of the firm as well as financing these assets. Specifically working capital
management requires financial managers to decide what quantities of cash, other liquid assets,
account receivables, and inventories the firm will hold at any time. In addition, financial managers
must decide how these current assets are to be financed. Financing choices include the mix of
current as well as long-term liabilities.
The high degree of divisibility has two important implications for the management of working
capital, first, if the management so chooses, working capital can be acquired piecemeal to meet
immediate needs as they arise. Such hand to mouth policy has advantage of reducing the average
investment in working capital, thereby minimizing the interest charges, insurance expenses and
the storage fees necessary to carry the investment. However, a hand to mouth policy has three
advantages: there will be increased ordering costs associated with greater likelihood that the firm
may experience a shortage in working capital,
Because there is no buffer stock to absorb unexpected fluctuations in requirement. By balancing
the savings in carrying costs against the cast of shortage and of more frequent procurement, the
management of a firm will generally find it profitable to maintain its working capital at a level
higher than the needed to meet its immediate needs. However, the relationships among carrying
costs, shortage costs, and procurement cost are such that most firms will find that the
Economic level of working capital is no more than a few months’ supply. This relative short
planning horizon in working capital decision contrasts sharply with the much longer planning
horizon in fixed capital decisions.
The second implication of divisibility, which follows logically from the first, concerns the
appropriate methods for financing working capital investments. The fact that the working capital
only amounts to a few month’s supply means that the working capital cycle, a cycle running cash
to inventories, inventories to receivables, and receivables to cash, is measured in months rather in
years. This liquidity of working capital allows the management a corresponding flexibility in its
financing decisions. Whereas fixed capital should generally be financed with long-term resources
of funds, working capital can be appropriately financed with either long-term funds or short term
or combination of both.
Working capital management is mainly the decision regarding the following:
a) RECEIVABLES MANAGEMENT
b) INVENTORY MANAGEMENT
c) SHORT TERM FINANCING
a) RECEIVABLES MANAGEMENT
Receivables management refers to the decisions a business makes regarding its overall credit
and collection policies and the evaluation of individual credit applicants. In formulating an
optional credit policy, the finance manager must analyze the marginal benefits and costs associated
with changes in credit standards, credit terms, and collection efforts. Receivables management
proves for a firm, both asset and a problem: an asset because of the promise of a future cash flow
and a problem because of the need to obtain financing while waiting for the future cash flow.
Account receivables are asset accounts representing amounts owed to the firm because of the sale
of goods and services in the ordinary course of business. The value of these claims is carried on
the balance sheet under titles such as account receivables, trade credit or customer receivables.
The financial manager can add value to the company’s shares by properly influencing three areas:
the company’s aggregate investment in receivables, its credit terms and its credit standards.
FACTORS INFLUENCING RECEIVABLES POLICY
Once the finance manager has decided the objective of accounts receivable policy is to
promote sales and profit until that point is reached, the return on investment in the further funding
of receivables is more than the cost of capital.
a) Cost
i) Collection cost
Money is spent in preparing and mailing reminders, hiring personnel or agencies to get the
payment, in acquiring credit information and in generally maintaining and operating a credit
department.
ii) Capital cost:
The firm must raise funds to finance credit, for the firm must pay its employees, its
suppliers and all others who manufactured or distribute the product while waiting for the customers
to pay for the product. This time gap means that the firm has to go out and raise funds to meet its
payments while waiting payments from the customer. A firm considering changing the size of its
accounts receivables must also consider the cost of additional funds or the savings from tracing
funds to calculating the correct financing cost for receivables.
In this case, two additional costs are commonly used:
(i) Cost of long-term depts.
(ii) Cost of existing long-term debt to correctly compute the savings involved in decreasing
its debts.
(iii) Delinquency costs:
The failure of the customer to pay on time adds collection costs above those associated with a
normal collection. Delinquency also ties up funds, which would be earning money elsewhere,
creating an opportunity cost for any additional time the funds are tied up after the normal collection
period.
Default cost or bad debt losses:
The firm incurs costs when the customer fails to pay at all. In additional to the collection costs,
capital costs and the delinquent costs incurred up to this point, the firm loses the cost of goods sold
but not paid for. It has to write off the entire sale once it decides the delinquent account has
defaulted and is no longer collectable.
Benefits
The firm incurs benefits from the receivable policy, which must be weighed against the
costs in order to determine the profitability of any particular accounts receivable policy. The
benefits are the increased sales and profit anticipated because of a more liberal policy.
INVENTORY MANAGEMENT
Inventory management is the process of efficiently overseeing the constant flow of units
into and out of an existing inventory. This process usually involves controlling the transfer in of
units in order to prevent the inventory from becoming too high, or dwindling to levels that could
put the operation of the company into jeopardy. Competent inventory management also seeks to
control the costs associated with the inventory, both from the perspective of the total
Value of the goods included and the tax burden generated by the cumulative value of the
inventory. Balancing the various tasks of inventory management means paying attention to three
key aspects of any inventory. The first aspect has to do with time. In terms of materials acquired
for inclusion in the total inventory, this means understanding how long it takes for a supplier to
process an order and execute a delivery. Inventory management also demands that a solid
understanding of how long it will take for those materials to transfer out of the inventory be
established. Knowing these two important lead times makes it possible to know when to place an
order and how many units must be ordered to keep production running smoothly.
Calculating what is known as buffer stock is also key to effective inventory management.
Essentially, buffer stock is additional units above and beyond the minimum number required to
maintain production levels. For example, the manager may determine that it would be a good idea
to keep one or two extra units of a given machine part on hand, just in case an emergency situation
arises or one of the units proves to be defective once installed. Creating this cushion or buffer helps
to minimize the chance for production to be interrupted due to a lack of essential parts in the
operation supply inventory.
Types of Inventory
Here is a quick guide to the different types of inventory. There are two basic types:
merchandising and manufacturing. Manufacturing is further divided into three more components :
raw material, work in process and finished goods.
1. Merchandise inventory:
If you buy items from other artists and crafters to sell in your own gallery or shop, you'll
have a merchandise inventory. Remember though - any items in your shop on consignment are not
part of your inventory.
2. Manufacturing inventory:
If you make your own arts and crafts, you'll have a manufacturing inventory. The term
'manufacturing' might not seem to fit a hand crafted type of business, but a quick review of the
classifications within the term, will make the relationship clearer.
A manufacturing inventory consists of three different parts: raw materials, work in process and
finished goods. Using a leather crafting business as my sample craft company, here are definit ions
and examples of the three:
a) Raw materials
Everything the crafter buys to make the product is classified as raw materials. That includes
leather, dyes, snaps and grommets. The raw material inventory only includes items that have not
yet been put into the production process.
b) Work in process
This includes all the leather raw materials that are in various stages of development. For
the leather crafting business, it would include leather pieces cut and in the process of being sewn
together and the leather belts and purse etc. that are partially constructed.
In addition to the raw materials, the work in process inventory includes the cost of the labor directly
doing the work and manufacturing overhead. Manufacturing overhead is a catchall phrase for any
other expenses the leather crafting business has that indirectly relate to making the products. A
good example is depreciation of leather making fixed assets.
c) Finished goods
When the leather items are completely ready to sell at craft shows or other venues, they are
finished goods. The finished goods inventory also consists of the cost of raw materials, labor and
manufacturing overhead, now for the entire product.
Inventory is probably one of the largest costs for merchandising and manufacturing businesses..
Find out how to account for inventory regardless if you are a retailer or manufacturer.
Purpose of holding inventory / Importance
1. Meet demand:-
In order for a retailer to stay in business, it must have the products that the customer wants on
hand when the customer wants them. If not, the retailer will have to backorder the product. If the
customer can get the good from some other source, he or she may choose to do so rather than
electing to allow the original retailer to meet demand later (through back-order). Hence, in
many instances, if a good is not in inventory, a sale is lost forever.
2. Keep operations running:-
A manufacturer must have certain purchased the dependency the operations. A machine or
work center is often dependent upon the previous operation to provide it with parts to work on. If
work ceases at a work center, then all subsequent centers will shut down for lack of work. If a
supply of work-in-process inventory is kept between each work center, then each. Machine can
maintain its operations for a limited time, hopefully until operations resume at the original center.
Items (raw materials, - components, or subassemblies) in order to manufacture its product.
Running out of only one item can prevent a manufacturer from completing the production of its
finished goods.
Inventory between successive dependent operations also serves to decouple
3. Lead time:-
Lead time is the time that elapses between the placing of an order (either a purchase order or a
production order issued to the shop or the factory floor) and actually receiving the goods ordered.
If a supplier (an external firm or an internal department or plant) cannot supply the required goods
on demand, then the client firm must keep an inventory of the needed Goods.
The longer the lead time, the larger the quantity of goods the firm must carry in inventory. A just-
in-time (JIT) manufacturing firm, such as Nissan in Smyrna, Tennessee, can maintain extremely
low levels of inventory. Nissan takes delivery on truck seats as many as 18 times per day. However,
steel mills may have a lead time of up to three months. That means that a firm that uses steel
produced at the mill must place orders at least three months in advance of their need. In order to
keep their operations running in the meantime, on-hand inventory of three months’ steel
requirements would be necessary.
4. Hedge:-
Inventory can also be used as a hedge against price increases and inflation. Salesmen routine ly
call purchasing agents shortly before a price increase goes into effect. This gives the buyer a chance
to purchase material, in excess of current need, at a price that is lower than it would be if the buyer
waited until after the price increase occurs.
5. Quantity discount:-
Often firms are given a price discount when purchasing large quantities of a good. This also
frequently results in inventory in excess of what is currently needed to meet demand. However, if
the discount is sufficient to offset the extra holding cost incurred as a result of the excess inventory,
the decision to buy the large quantity is justified.
6. Smoothing requirements:-
Sometimes inventory is used to smooth demand requirements in a market where demand is
somewhat, erratic. Notice how the use of inventory has allowed the firm to maintain a steady rate
of output (thus avoiding the cost of hiring and training new -personnel), while building up
inventory in anticipation of an increase in demand. In fact, this is often called anticipat ion
inventory. In essence, the use of inventory has allowed the firm to move demand requirements to
earlier periods, thus smoothing the demand.
Meaning of Inventory management
The overseeing and controlling of the ordering, storage and use of components that a
company will use in the production of the items it will sell as well as the overseeing and controlling
of quantities of finished products for sale. A business's inventory is one of its major assets and
represents an investment that is tied up until the item is sold or used in the production of an item
that is sold. It also costs money to store, track and insure inventory. Inventories that are
mismanaged can create significant financial problems for a business, whether the mismanagement
results in an inventory glut or an inventory shortage.
Successful inventory management involves creating a purchasing plan that will ensure that items
are available when they are needed (but that neither too much nor too little is purchased) and
keeping track of existing inventory and its use. Two common inventory-management strategies
are the just-in-time method, where companies plan to receive items as they are needed rather than
maintaining high inventory levels, and materials requirement planning, which schedules material
deliveries based on sales forecasts.
1. Meet variation in Production Demand
Need for Inventory management
Inventory is a necessary evil that every organization would have to maintain for various purposes.
Optimum inventory management is the goal of every inventory planner. Over inventory or under
inventory both cause financial impact and health of the business as well as effect business
opportunities.
Inventory holding is resorted to by organizations as hedge against various external and internal
factors, as precaution, as opportunity, as a need and for speculative purposes.
Reasons why organizations maintain Raw Material Inventory
Most of the organizations have raw material inventory warehouses attached to the production
facilities where raw materials, consumables and packing materials are stored and issue for
production on JIT basis. The reasons for holding inventories can vary from case to case basis.
Production plan changes in response to the sales, estimates, orders and stocking patterns.
Accordingly the demand for raw material supply for production varies with the product plan in
terms of specific SKU as well as batch quantities.
Holding inventories at a nearby warehouse helps issue the required quantity and item to production
just in time.
2. Cater to Cyclical and Seasonal Demand
Market demand and supplies are seasonal depending upon various factors like seasons;
festivals etc. and past sales data help companies to anticipate a huge surge of demand in the market
well in advance. Accordingly they stock up raw materials and hold inventories to be able to
increase production and rush supplies to the market to meet the increased demand.
3. Economies of Scale in Procurement
Buying raw materials in larger lot and holding inventory is found to be cheaper for the company
than buying frequent small lots. In such cases one buys in bulk and holds inventories at the plant
warehouse.
4. Take advantage of Price Increase and Quantity Discounts
If there is a price increase expected few months down the line due to changes in demand and
supply in the national or international market, impact of taxes and budgets etc., the company’s
tend to buy raw materials in advance and hold stocks as a hedge against increased costs.
Companies resort to buying in bulk and holding raw material inventories to take advantage of
the quantity discounts offered by the supplier. In such cases the savings on account of the discount
enjoyed would be substantially higher that of inventory carrying cost.
Objectives of Inventory Management
Through the efficient Management of Inventory of the wealth of owners will be
maximized. To reduce the requirement of cash in business, inventory turnover should be
maximized and management should save itself from loss of production and sales, arising
from its being out of stock. On the other hand, management should maximize stock
turnover so that investment in inventory could be minimized and on the other hand, it
should keep adequate inventory to operate the production & sales activities efficiently.
The main objective of inventory management is to maintain inventory at appropriate level
so that it is neither excessive nor short of requirement Thus, management is faced with 2
conflicting objectives
1. To keep inventory at sufficiently high level to perform production and sales
activities smoothly
2. To minimize investment in inventory at minimum level to maximize profitability
Both in adequate & excessive quantities of inventory are undesirable for business. These
mutually conflicting objectives of inventory management can be explained is from of costs
associated with inventory and profits accruing from it low quantum of inventory reduces
costs and high level of inventory saves business from being out of stock & helps in running
production & sales activities smoothly. The objectives of inventory management can be
explained in detail as under:-
To ensure that the supply of raw material & finished goods will remain continuous so that
production process is not halted and demands of customers are duly met.
To minimize carrying cost of inventory.
To keep investment in inventory at optimum level.
To reduce the losses of theft, obsolescence & wastage etc.
To make arrangement for sale of slow moving items.
To minimize inventory ordering costs.
SHORT TERM FINANCING
Working capital management is the management the firm’s short-term assets and liabilit ies.
This include decisions as the level of cash balance to maintain the account of cash to be invested
in securities over the weekend, when the particular suppliers are to be paid,
Whether a credit limit for a customer should be increased, or the borrowing to be done under the
line of credit for the month. The main types of short-term financing are:
1. TRADE CREDIT
Whenever a business receives a merchandise ordered from a supplier and the is permitted to
wait a specified period before having to pay, it is receiving trade credit. Trade credit is the most
important source of short term financing for business firms.
2. ACCRUED EXPENSES
Accrued expenses – such as accrued wages, taxes and interest – represent liabilities for services
rendered to the firm that have not paid for by the firm. As such, they constitute an interest free
source financing.
3. DEFERRED INCOME
Deferred income consists of payments received for goods and services that the firm has agreed
to deliver at some future date. Because these payments increase the firm’s liquidity and assets –
namely, cash—they constitute a source of funds.
4. COMMERCIAL PAPER
Commercial paper consists of short – term unsecured promissory notes issued by major
corporations. Maturities on commercial paper at the time of issue range from several days to
months. Large issue of commercial papers normally attempts to tailor the maturity and amounts of
an issue to the needs of an investor.
5. BANK CREDIT ARRANGEMENT
Single payment loan
The simplest credit arrangement is a single payment loan, or note. It is frequently granted
for a specific purpose, with a definite beginning and ending time. The note can be either a discount
note or add-on note. For a discount note, the amount of cash advanced under the loan agreement
is the face value of the loan less the amount interest for the period covered. For an add-on note,
the interest is added to the principal to determine the cash flow at maturity.
CHAPTER 3
DATA ANALYSIS AND INTERPRETATION
3.0 DATA ANALYSIS AND INTERPRETATION
LIQUIDITY RATIO
The term liquidity refers to the firm’s ability to meet its current liabilities when they
become due. Liquidity ratios are used to measure the liquidity position or short term financ ia l
position of a firm. The bankers and creditors for materials are interested in the liquidity position.
The ratios which reflect the short term solvency of a business unit are current ratio, Quick ratio,
working capital turnover ratio, fixed asset turnover ratio etc…
CURRENT RATIO
This ratio measures the solvency of the company in the short term. It shows the firm’s
ability to cover the current liabilities with current asset. Generally 2:1 is considered ideal for a
concern i.e.: current assert should be twice of the current liabilities. It expressed as follows.
Current Ratio =
It is an index of the strength of working capital. The higher the current ratio, greater the
firm’s ability to meet short term debts. Avery high current ratio indicates that funds are not being
economically used in the firm. There may be excessive inventories or accounts receivable or large
idle cash balance. Avery low current ratio indicates that the firm wills it difficult to pay of its debts.
It is essential that a firm should have a reasonable current ratio
QUICK RATIO OR LIQUID RATIO
As regards the ability to honor day-to-day commitment, liquid ratio is a better tool. It is
the ratio between liquid assets and liquid liabilities. From balance sheet, liquid Assets are
calculated by deducting inventories and pre – paid expenses from current assets. Liquid liabilit ies
are current liabilities less bank overdraft.
Liquid Ratio =
Liquid asset = Current asset – (stock + prepaid expenses)
Current Assets
Current Liabilities
Liquid Assets
Current Liabilities
Quick ratio of 1:1 is considered as satisfactory or ideal. It means that the liquid assets are just
equal quick / current liabilities. If the quick ratio is 1:1 or more than 1:1, the financial position of
the firm is said to be good. It indicates that quick asset is sufficient to pay off the short term
obligations. If the ratio is less than 1:1, the financial position is said to be unsound. This means
that the firm will not be able to pay off its current liabilities when they become due.
CASH RATIO
It is relationship between cash and current liabilities.
Cash
Current liabilities
ACTIVITY RATIO
Activity ratios show how efficiently a firm uses its available resources or assets .These
ratios indicate efficiency in asset management. These ratios are also known as efficiency ratios or
asset utilization ratios. These ratios indicate the speed with which the resources are turned over or
converted in to sales. Important activity turnover ratios are:-
INVENTORY TURNOVER RAITO OR STOCK TURNOVER RATIO
This is also called as Inventory Ratio or Stock Velocity Ratio. This ratio is a relationship
between the cost of goods sold during a particular period of time and the cost of average inventory
during a particular period. It is expressed in number of times. Stock turnover ratio/Inventory
turnover ratio indicates the number of time the stock has been turned over during the period and
evaluates the efficiency with which a firm is able to manage its inventory. This ratio indicates
whether investment in stock is within proper limit or not.
Cost of Goods Sold
Stock Turnover Ratio = ….………....………………
Average Inventory at Cost
Cost of goods sold = Opening stock + purchases + direct expenses – closing stock (or)
Cost of goods sold = sales – gross profit
Average stock = opening stock + closing stock / 2
INVENTORY CONVERSION PERIOD
The inventory conversion period is the time required to obtain materials for a product in order to
manufacture and sell it. The inventory conversion period is essentially the time period during
which a company must invest cash while it converts materials in to a sale.
Inventory conversion period = Days/months in a year
Inventory turnover ratio
DEBTOR’S TURNOVER RATIO
Debtor’s Turnover Ratio is also termed as Receivable Turnover Ratio or
Debtor’s Velocity. Receivables and Debtors represent the uncollected portion of credit sales.
Debtor’s velocity indicates the number of times the receivables are turned over in business during
a particular period. In other words, it represents how quickly the debtors are converted into cash.
It is used to measure the liquidity position of a concern. This ratio establishes the relationship
between receivables and sales.
Net Credit Sales
Debtor’s Turnover Ratio = ……………………….
Debtors
DEBTORS COLLECTION PERIOD
This ratio is related with and dependent upon debtor’s turnover ratio. Average collection
period means the number of days or months for which debtors and bills receivable remain
outstanding.
Debtors collection period = Days/ months in a year
Debtor’s turnover ratio
WORKING CAPITAL TURNOVER RATIO
Working Capital Turnover Ratio highlights the effective utilization of working capital with
regard to sales. This ratio represents the firm’s liquidity position. It indicates the number of times
the working capital is converted to sales.
Cost of goods sold
Working Capital Turnover Ratio =
Net Working capital
FIXED ASSET TURNOVER RATIO
This ratio measures the efficiency of the assets used. The efficient use of asset will generate
generated greater sales per rupees invested in all the assets but also of a concern. This ratio
important in case of manufacturing concern because sales are produced not only by of current
assets but also by amount invested in fixed assets. It is calculated as under
Fixed asset turnover ratio = Net sales
Fixed asset
CURRENT ASSET TURNOVER RATIO
This ratio shows relationship between sales and current asset of the company. More
clearly, turnover of current assets with regards to sales of the company. It is calculated by using
the formula given below.
Net sales
Current asset turnover ratio = ……………………...
Current asset
PROFITABILITY RATIOS
The term profitability refers to the ability of a firm to earn maximum profit from best
utilization of its resources. The profitability of a firm can be easily measured its profitability ratios.
Profitability ratios measure the ability of a firm to earn an adequate return on sales, total assets and
invested capital. There are two types of Profitability ratios .First profitability ratios based on sales
and second profitability ratios based on investment. The important profitability ratios are:-
GROSS PROFIT RATIO
Gross Profit Ratio established the relationship between gross profit and net sales. This ratio
is calculated by dividing the Gross Profit by Sales. It is usually indicated as percentage.
Gross Profit
Gross Profit Ratio = ……………….x 100
Net Sales
NET PROFIT RATIO
Net profit ratio is also termed as Sales Margin Ratio (or) Profit Margin Ratio (or) Net profit
to sales Ratio. This ratio reveals the firm’s overall efficiency in operating the business. Net profit
ratio is used to measure the relationship between net profit (either before or after taxes) and sales.
Net profit
Net profit ratio = ………………… x100
Net sales
OPERATING RATIO
Operating ratio expresses the relationship between operating cost and sales. It indicates the overall
efficiency in operating the business .The operating ratio expressed as:
Operating ratio = Cost of goods sold + Operating expenses
…………………………………… x100
Net Sales
Operating Expense = Cost of goods sold +Office &administration + Selling expenses
INVENTORY TO WORKING CAPITAL RATIO
Inventory is a part of working capital. This shows the relationship between inventory and working
capital. This helps to know the influence of inventory on working capital of the company. This is
calculated by using the formula given below.
Inventory
Inventory turnover ratio = ………………….
Working capital
TREND ANALYSIS
Trend analysis means analyzing general tendencies in each item of the financial statements
on the basis of the data of the base year. In short, comparing the past data over a period of time
with a base year is called trend analysis. Under this technique, information for number of years is
taken up and one year is taken as the base year .Each item of the base year is taken as 100 and on
that basis the percentage for other years is calculated.
Steps in computation of Trend Percentages
Select a base year. Generally ,the first year is taken as base year
Take the figures of base year 100
Calculate trend percentages in relation to base year .Each year’s figure is divided by the
base years figure. If the amount of the same item in the year is more than that in the base
year, the trend percentage would be more than 100% and if the amount is less than the base
year amount, trend percentage would be less than 100%. The trend ratios of subsequent
year’s financial statements should be calculated by applying the following formula
Absolute figure of financial statement under study x 100
Absolute figure of same item in base financial statement
Objectives of Trend Analysis
To find the trend or direction of movement over a period of time
To make a comprehensive and comparative study of financial statements
To have a better understanding of financial and profitability position
STATEMENT OF CHANGES IN WORKING CAPITAL
Statement of changes in working capital is prepared with the help of current assets and current
liabilities .This statement shows changes in current asset and current liabilities. The purpose of
this statement is to find out the net changes in working capital. Working capital is the difference
between current assets and current liabilities. It is also called working capital variation statement.
The rules in preparation of schedule of changes in working capital:
Increase in current asset will increase the working capital
Decrease in current asset will increase the working capital
Increase of current liabilities will decrease the working capital
Decrease in current liabilities will increase the working capital
CURRENT RATIO = CURRENT ASSETS/CURRENT LIABILITY
Table no 3.1
Current ratio
YEAR
CURRENT
ASSETS
CURRENT
LIABILITY
RATIO
2008-2009
126722770
48712477
2.60
`
2009-2010
153099083
64688453
2.36
2010-2011
152641298
59972229
2.54
2011-2012
155872097
57307462
2.71
2012-2013
162630668
59126321
2.75
(Source: annual report)
Chart no 3.1
Interpretation: - The standard current ratio is 2:1. Table is revealing current ratios in last 5 years it is found
to be higher than standard ratio. The movements of ratios are not consistent. The current ratio very high in
2012-2013 it is 2.75. The table is showing that after 2009-2010 the current ratio is increasing. 2012- 2013
the current ratio is very high. It is higher than standard ratio. This indicates company has properly
maintained the current ratio during the period 2012-2013. Hence the liquidity position is satisfactory.
2
2.2
2.4
2.6
2.8
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013
CURRENT RATIO
CURRENT RATIO
QUICK RATIO = QUICK ASSETS/CURRENT LIABILITY
Table no 3.2
Quick ratio
YEAR
QUICK ASSETS
CURRENT
LIABILITY
RATIO
2008-2009
56412915
48712477
1.15
2009-2010
63943186
64688483
.99
2010-2011
65036464
59972229
1.08
2011-2012
69497707
57307462
1.21
2012-2013
73511780
59126321
1.24
(Source: annual report)
Chart no 3.2
Interpretation: - The standard quick ratio is 1:1. A table shows quick ratio of company is higher than
standard ratio from the 2009-2013. From the analysis the highest quick ratio was found in 2012-2013 it is
1.24
0
0.2
0.4
0.6
0.8
1
1.2
1.4
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013
QUICK RATIO
QUICK ASSET
CASH RATIO = CASH AND BANK+ SHORT TERM SECURITIES
/CURRENT LIABILITY
Table no 3.3
Cash ratio
YEAR
CASH AND BANK + SHORT
TERM SECURITIES
CURRENT
LIABILITY
RATIO
2008-2009
1984628
48712477
0.04
2009-2010
7412543
64688453
.11
2010-2011
10109729
59972229
.16
2011-2012
14021207
57307462
.24
2012-2013
11103117
59126321
.18
(Source: annual report)
Chart no 3.3
Interpretation: - The standard ratio is .5. Chart is showing very low absolute liquidity ratios during the
period 2009-2013. From the analysis highest absolute liquidity ratio was found in 2011-2012.The lowest
absolute liquidity ratio was in 2008-2009. Comparing to standard ratio absolute liquidity ratio is low. This
indicates the cash and cash equivalents are not being properly used in financing the company.
0
0.05
0.1
0.15
0.2
0.25
0.3
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013
CASH RATIO
Cash ratio
INVENTORY TURNOVER RATIO = COST OF GOODS SOLD OR SALES /
AVERAGE STOCK
Table no 3.4
Inventory turnover ratio
YEAR
SALES
AVERAGE
STOCK
RATIO
2008-2009
183036578
57492574
3.1
2009-2010
224243415
65284487
3.4
2010-2011
265764540
70951436
3.7
2011-2012
265042554
73908183
3.5
2012-2013
285029616
79337709
3.5
(Source: annual report)
Chart no 3.4
Interpretation: - By the analyzing the five years it has been found in the initial stock turnover ratio was
moving in a slow pace the ratio. During the five years study period the stock turnover ratio is consistent the
average stock turn over ratio is 3.44
2.8
3
3.2
3.4
3.6
3.8
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013
INVENTORY TURNOVER RATIO
INVENTORY TURN OVER RATIO
Tableno 3.5
Debtor’s turnover ratio
YEAR
CREDIT SALES
AVERAGE
DEBTORS
DEBTORS
TURN OVER
RATIO
2008-2009
183036578
40681100
4.4
2009-2010
224243415
51739967
4.3
2010-2011
265764540
54525500
4.8
2011-2012
265042554
52220050
5.0
2012-2013
285029616
55345209
5.1
(Source: annual report)
Chart no 3.5
Note: since credit sales figure not given by the company, the analysis of total sales is assumed to
be credit sales
Interpretation: - Generally a low debtor’s turnover ratio a better cash flow. The ratio indicates the time
at which the debtors are collected on an average during the year. Needless to say that a high debtor turnover
ratio implies short term collection period made by the customer. From the analysis of five year data the
company’s debtor’s turnover ratio is the increasing year by the year. So the company is becoming efficient
collect their debt from debtors
3.54
4.55
5.5
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013
DEBTORS TURNOVER RATIO
debtors turnoveratio
DEBTORS TURN OVER RATIO =CREDIT SALES/AVERAGE
DEBTORS
Table no 3.6
Debtor’s collection period
YEAR
DAYS IN YEAR
COMPANY
OPERATING
DEBTORS
TURNOVER
RATIO
DEBTORS
COLLECTION
PERIOD
2008-2009
360
4.4
82
2009-2010
360
4.3
83
2010-2011
360
4.8
75
2011-2012
360
5.0
72
2012-2013
360
5.1
70
(Source: annual report)
Chart no 3.6
Interpretation: - debtor’s collection period indicates the time taken to convert the receivables in to cash
by the firm. Debtor’s collection period of the company during 2008-2009 was 82 days it has become is 70
days during 2012-2013. Actually the company is allowing the debtors to pay within 90 days. Company is
collecting the entire debt within 90 days hence through analysis it was found that the company is able to
collect the debt from the debtors before the allotted time.
60
70
80
90
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013
debtors collection period
debtors collection period
DEBTORS COLLECTION PERIOD =360 DAYS/ DEBTORS TURNOVER
RATIO
SOLVENCY RATIO = TOTAL DEBT/ TOTAL ASSET
Table no 3.7
Solvency ratio
YEAR
TOTAL DEBT
TOTAL ASSET
RATIO
2008-2009
75504033
163635164
.46
2009-2010
91439137
194181820
.98
2010-2011
102339187
209718738
.48
2011-2012
95541996
202333422
.47
2012-2013
95879340
201874092
.47
(Source: annual report)
Chart no 3.7
Interpretation: - The standard total debt ratio is 1:1. It is clear from the table that the total debt ratios of
the company during the last 5 years is found to be very low. The lowest total debt ratio is in 2008-2009 it
is .46. While in 2009-2010 it has slightly gone up by .98 a lower total debt ratio is not good sign for the
company. This indicates the company is not utilizing the benefits from debt opportunities. It shows the
inefficiency of the company in managing its debt financing
0
0.2
0.4
0.6
0.8
1
1.2
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013
SOLVENCY RATIO
FIXED ASSET TURNOVER RATIO= SALES/FIXED ASSET
Table no 3.8
Fixed asset turnover ratio
YEAR
SALES
FIXED ASSET
RATIO
2008-2009
183036578
42248773
4.3
2009-2010
224243415
41077531
5.45
2010-2011
265764540
39173510
6.78
2011-2012
265042554
38202395
6.93
2012-2013
285029616
40684495
7
(Source: annual report)
Chart no 3.8
Interpretation: - Fixed asset turnover ratio indicates how effectively fixed assets are used to generate sales.
The table shows, that fixed asset turnover ratio is consistently increasing over the years. This indicates
utilization of fixed assets in generating sales. The highest ratio is in 2012-13 and the lowest ratio is in 2009-
10
0
1
2
3
4
5
6
7
8
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013
FIXES ASSET TURNOVER RATIO
FIXED ASSET TURNOVER
RATIO
Table no 3.9
Working capital turnover ratio
YEAR
NET SALES
WORKING
CAPITAL
RATIO
2008-2009
183036578
69901901
2.6
2009-2010
224243415
78010292
2.8
2010-2011
265764540
88410629
3.0
2011-2012
265042554
92669069
2.6
2012-2013
285029616
98564635
2.8
(Source: annual report)
Chart no 3.9
Interpretation: - Standard working capital turnover ratio is 7 or 8 times. The table reveals that shows it is
clear that the working capital turnover ratio is very low during the 5 years. This indicates the working
capital is not effectively used in generating sales. The chart clearly revels that the working capital turnover
ratio is moving upward and downward of irrespective of year .A very high ratio indicate over standing this
means there is low investment in working capital.
2.6
2.8
3
2.6
2.8
2.4
2.5
2.6
2.7
2.8
2.9
3
3.1
2008-20092009-20102010-20112011-20122012-2013
working capital turnover ratio
working capital turnover ratio
WORKING CAPITAL TURNOVER RATIO = NET SALES / WORKING
CAPITAL
Table no
3.10
Creditor’s turnover ratio
YEAR
CREDIT
PURCHASE
AVERAGE
CREDITORS
CREDIT TURN
OVER RATIO
2008-2009
82394278
44680182
1.8
2009-2010
107092251
51820849
2.0
2010-2011
115486762
55774424
2.0
2011-2012
143203584
548219075
2.6
2012-2013
186164659
54323822
3.4
(Source: annual report)
Chart no 3.10
Interpretation: - the table shows the creditors turn over ration reveals the ability of the firm to avail the
credit facility from the suppliers throughout the year. Generally a low creditor’s turn over ration implies
favorable since the firm enjoy lengthy credit period. If the analysis of five year data it was found creditors
turnover ratio of the company showing an increasing trend year by year.
0
1
2
3
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013
creditors turnover ratio
creditors turnover ratio
CREDITORS TURNOVER RATIO= NET CREDIT PURCHASES /
AVERAGE CEDITORS
Table no 3.11
Creditors Payment period
YEAR
DAYS IN YEAR
COMPANY
OPERATING
CREDITORS
TURNOVER
RATIO
CREDITORS
PAYMENT
PERIOD
2008-2009
360
1.8
200
2009-2010
360
2.0
180
2010-2011
360
2.0
180
2011-2012
360
2.6
138
2012-2013
360
3.4
105
(Source: annual report)
Chart no 3.11
Interpretation: Creditor’s payment period indicates the time taken to make payment of dues by the firm.
Creditor’s payment period of the company was 200 days during the year 2008-2009 it is showing a
decreasing trend throughout the study period it has come 105 days during the period of 2012-2013. The
0
100
200
300
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013
creditors payment period
creditors payment period
CREDITORS PAYMENT PERIOD =360 DAYS/ CREDITORS
TURNOVER RATIO
creditors of the company are providing an average 150 days for making their payments During the initial
years study the company was not able to make their due to suppliers on time but the present operation cycle
of the company is very much production it has reduced the payment period due to the implementation of
highly innovated and sophisticated technology for the production
Table no 3.12
Current asset turnover ratio
YEAR
NET SALES
CURRENT
ASSET
RATIO
2008-2009
183036578
126722770
1.4
2009-2010
224243415
153099083
1.46
2010-2011
265764540
152641298
1.74
2011-2012
265042554
15872097
1.7
2012-2013
285029616
162630668
1.75
(Source: annual report)
Chart no 3.12
1.4 1.461.74 1.7 1.75
0
0.5
1
1.5
2
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013
CURRENT ASSET TURNOVER RATIO
CURRENT ASSET TURNOVER RATIO = NET SALES / CURRENT
ASSET
Interpretation: - The table and chart reveals that the current asset turnover ratio from 2008-2013. In 2008-
2009 the ratio was 1.4 and it increased to 1.74 in 2010-2011.In 2012-2013 the ratio has increased to 1.75.
This shows that the company is managing assets efficiently. The sales and current assets are increasing year
by year which is a benefit to the company.
SCHEDULE OF CHANGES IN WORKING CAPITAL FOR THE YEAR 2008-2009 AND
2009-2010
Table no 3.13
Particulars 2008-2009 2009-2010 Increase in Decrease in
WC (Rs) WC (Rs)
Current Assets:- Inventories 56618141 58367007 1748866
Debtors 34296182 47066018 12769836
Cash 5354196 1984628 3369568
Other current Assets 96145 105976 9831
Loans & advances 14185126 19199141 5014015
Total current Assets 110549789 126722770
Current liabilities :
provision
40647887
48712478
8064589
Net working capital 69901901 78010292
Increase in WC 8108391 8108391
78010292 78010292 19542548 19542548
Interpretation: -The table shows the schedule of changes in Working capital, from the analysis it is clear
that the Current assets like Inventories, Sundry debtors has shown an increment from 2008 to year 2010
along loans and advances and other current assets have increased . So the total current assets have increased.
the current liabilities provisions has decreased while current liabilities has increased, which made positive
effect on net working capital and it has increased . From the analyzed it was found that most of the funds
are used for increasing their working capital and to purchase fixed assets. Deposits, borrowings, funds from
operation are major sources of funds .Therefore the overall working capital has increased from 2008-2009
to 2009-2010.
SCHEDULE OF CHANGES IN WORKING CAPITAL FOR THE YEAR2009-2010 AND
2010-2011
Table no 3.14
Interpretation:- The above table shows the schedule of changes in Working capital ,from the analysis it is
clear that the Current assets like Inventories, Sundry debtors has shown increment from 2009-2010 to the
year 2010-2011 and loans and advances and other current assets has increased . The total current assets
Particulars 2009-2010 2010-2011 Increase in Decrease in
WC (Rs) WC (Rs)
Current Assets:-
Inventories 58367007 72201967 13834960
Debtors 47066018 56413916 9347898
Cash 1984628 7412543 5427915
Other current Assets 105976 121941 15965
Loans & advances 19199141 16948715 2250426
Total current Assets 126722770 153099082
Current liabilities :-
provisions 48712478 64688453 15975975
Networking capital 78010292 88410629
Increase o in WC 10400337 10400337
88410629 88410629 28626738 28626738
have increased. Among the current liabilities provisions have decreased and current liabilities has increased,
which made positive effect on net working capital. Therefore the overall working capital has increased from
2009-2010 to 2010-2011.
SCHEDULE OF CHANGES IN WORKING CAPITAL FOR THE YEAR2010-2011 AND
2011-2012
Table no 3.15
Particulars 2010-2011 2011-2012 Increase in Decrease in
WC (Rs) WC (Rs)
Current Assets:-
Inventories 72201967 69700906 2501061
Debtors 56413916 52637084 3776832
Cash 7412543 10109729 2697186
Other current Assets 121941 65925 56016
Loans & advances 16948715 20127654 3178939
Total current Assets 153099082 152641298
Current liabilities &
provisions 48712478 59972229 4716224
Networking capital 78010292 92669069
Increase in WC 4258440 4258440
92669069 92669069 10592349 10592349
Interpretation: - The table shows the schedule of changes in Working capital, from the analysis it is clear
that the Current assets like Inventories, Sundry debtors has shown decreased from 2008 to year 2010 along
loans and advances and other current assets have increased. So the total current assets have increased. The
current liabilities provisions have increased which made positive effect on net working capital and it has
increased. From the analyzed it was found that most of the funds are used for increasing their working
capital and to purchase fixed assets. Deposits, borrowings, funds from operation are major sources of funds
.Therefore the overall working capital has increased from 2010-2011 to 2011-2012.
SCHEDULE OF CHANGES IN WORKING CAPITAL FOR THE YEAR2011-2012 AND
2012-2013
Table no 3.16
Particulars 2011-2012 2012-2013 Increase in Decrease in
WC (Rs) WC (Rs)
Current Assets:-
Inventories 69700906 78115460 8414554
Debtors 52637084 51803016 834068
Cash 10109729 14021207 3911478
Other current Assets 65925 30899 35026
Loans & advances 20127654 11901515 8226139
Total current Assets 152641298 155872097
Current liabilities &
provisions 59972229 57307462 2664767
Networking capital 92669069 98564635
Increase or decrease in
WC
5895566
98564635 98564635 14990799 14990799
Interpretation:-From the above table it was analyzed that most of the funds were used for increase in
working capital, to purchase fixed assets. Deposits, borrowings, funds from operation are major sources of
funds .Therefore the overall working capital has increased from 2011-2012 to 2012-2013.
TREND ANALYSIS
CURRENT ASSETS & CURRENT LIABILITIES
Table no 3.17
YEAR
2008-2009
2009-2010
2010-2011
2011-
2012
2012-2013
CURRENT
ASSETS
126722770
153099083
152641298
15872097
162630668
CURRENT
LIABILITIES
48712477 64688453 59972229 57307462 59126321
TREND
PERCENTAGE
2008-2009
2009-2010
2010-2011
2011-
2012
2012-2013
CURRENT
ASSETS
100
120.81
120.45
123.00
128.33
CURRENT
LIABILITIES
100
132.79
123.11
117.64
121.37
(Source: annual report)
Chart no 3.13
Interpretation: The above table shows the trend analysis of current assets & current liabilities of Nagarjuna
Ltd. for the period from 2008-2009 to 2012-2013. Here the base year is taken as 2008-2009, it is 100.The
current assets has increased from 100% to 120% in 2009-2010 together increased to 123% in 2011-2012.In
2012-2013 it has increased to 128%. The Current liabilities has increased from 100% to 132% in 2009-
2010 and then moving on the base of decreasing to 123% 2010-2011, then it is decreasing to 117% in
2011-2012.In 2012-2013 it has increased to 121 %. The figure indicates that current assets are increasing
year by year, while the current liabilities decreasing year by year. This data reveals that the firm has less
liability. The current position reveals that the company can manage current liability.
0
50
100
150
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013
CURRENT ASSETS
CUURENT
LIABILITY
NETSALES & WORKING CAPITAL
Table no 3.18
(Source: annual report)
Chart no 3.14
Interpretation: the above table shows the trend analysis of working capital and sales of Nagaruna
ltd for the period of 2008-2009 to 2012-2013 here the working capital has increased to 111 in
2010-2011 and it moving on every year and in 2012-2013 it has increased to 141. The analysis
revel that in 2009-2010 net sales has increased from 100% to 122% further increased to 155%.
The data revels increasing trend in net sales the working capital has increased ever year which
reveals that firm’s working capital is effectively utilized for sales
0
50
100
150
200
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013
SALES WORKING CAPITAL
YEAR
2008-2009
2009-2010
2010-2011
2011-2012
2012-2013
NET SALES
183036578
224243415
265764540
265042554
285029616
WORKING
CAPITAL
69901901
78010292
88410629
92669069
98564635
TREND
PERCENTAGE
2008-2009
2009-2010
2010-2011
2011-2012
2012-2013
SALES
100
122.51
145.19
144.80
155.72
WORKING
CAPITAL
100
111.59
126.47
132.57
141.00
NET PROFIT
Table no 3.19
(Source: annual report)
Chart no 3.15
Interpretation: The above table reveals the trend analysis of net profit of Nagarjuna ltd for the
period from 2008-2009 to 2012-2013. Here 2008-2009 is taken as base year, it is 100.The net profit
is showing a fluctuating trend, in 2009-2010 it has decreased from 100% to 94.39% and it
decreased to 69.2% in 2010-2011. In 2011-2012 it has again increased to 76.1% and in 2012-2013
it further increased to 90.6%, the net profit is shows the increasing trend recently. The firm is
showing efficiency in both profitability and performance because of reduced expenses.
0
50
100
150
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013
NET PROFIT
NET PROFIT
YEAR
2008-2009
2009-2010
2010-2011
2011-2012
2012-2013
NET PROFIT
30217881
28522954
20927322
23003964
27388432
TREND
PERCENTAGE
2008-2009
2009-2010
2010-2011
2011-2012
2012-2013
NET PROFIT
100
94.39
69.2
76.1
90.6
NET SALES
Table no 3.20
(Source: annual report)
Chart no 3.16
Interpretation: - The above table shows the trend analysis of net sales of Nagarjuna Ltd. for the period
from 2008-2009 to 2012-2013. Here 2008-2009 is taken as base year. The analysis reveal that in 2009-
2010 net sales have increased from 100% to122% further increased to 155% in 2012-2013, The data
reveals that there is increasing trend in net sales, which shows that the sales is increasing year by year which
means it is efficiently utilizing.
YEAR
2008-2009
2009-2010
2010-2011
2011-2012
2012-2013
NET SALES
183036578
224243415
265764540
265042554
285029616
TREND
PERCENTAGE
2008-2009
2009-2010
2010-2011
2011-2012
2012-2013
SALES
100
122.51
145.19
144.80
155.72
0
50
100
150
200
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013
NET SALES
NET SALES
CHAPTER 4
FINDINGS, CONCLUSIONS AND SUGGESTIONS
4.0 FINDINGS
As per the study found that Current ratio of the company for all the years under study is
above the standard of 2:1. So the current position of the company is satisfactory.(table 3.1)
Quick ratio is an indicator of short- term solvency of the company. Short term Solvency means
ability to meet the short term liability. It can be conclude from the analysis that the short term
solvency of the company is high.(table 3.2)
Comparing to standard ratio, the absolute liquidity ratio is very less. This indicates the cash
and cash equivalents are not properly used in financing the company’s activities .(table 3.3)
Inventory turnover ratio during the five years study period revealed to be consistent. The average
stock turnover ratio is 3.44 (table 3.4)
Debtor’s turnover ratio of the company is increasing year by year. This revealed that the company
is becoming more efficient in collect their debt from debtors (table 3.5)
Average Debtors collection period of the company throughout the study period is 76 days since the
company allowed 90 days to their debtors (table 3.6)
From this analysis of total debt ratios of the company during the last 5 years are found to
be very low. A lower current ratio is not good for the company. This indicates the company
is not utilizing the benefits from debt opportunities. It shows the inefficiency of the
company in managing its debt financing.(table 3.7)
Fixed asset turnover ratio is consistently increasing over the years. This indicates utiliza t ion
of fixed assets in generating sales.(table 3.8)
Working capital turnover ratio is very low during the last 5 years. This highlighted the working
capital is not effectively used in generating sales(table 3.9)
Creditors turnover ratio of the company showing an increasing trend throughout the study period
(table 3.10)
Average credit payment period throughout the study period is 148 days since the company got 150
days for retaining the dues, the company is efficient for making their payments to their creditors
(table 3.11)
In the analysis of schedule of changes in working capital, it was found that net working
capital for the past five years is showing an increasing trend. The increasing trend made
positive effect on net working capital. Therefore it was found that net working capital
position of the firm is fluctuating over the years. This analysis revealed the company is
utilizing its short-term resources for working capital
From the study it has been found that the current asset is increasing every by year. Whereas
the current liability is showing a decreasing trend. It means that the current asset of the
company is efficiently utilized (table 3.17)
Net sales and working capital is showing an increasing trend during five years study period
(3.18)
Net profit of the company was found to be fluctuating throughout the study period (table
3.19)
From the study it was found that the net sales of the company is increasing every year(
table 3.20)
4.1 SUGGESTIONS.
Since the absolute cash ratio of the company Nagarjuna Ltd is below the standard that is
0.50, throughout the study period the company must have to invest a lump sum from the
sales proceeds as cash and cash equivalents.
The company is not having good liquidity position, hence it is suggested to upgrade and
expand their market through advertisement and increase profitability.
The company can plan of investing more amounts on research and development. So that
innovative product can be developed in order to sustain in the competitive environment
It is recommended that the company should use any cost control system to reduce the
operating expenses of the company.
The company can use modern techniques to upgrade the product quality
4.2 CONCLUSION
The study was conducted on the topic “A study on impact of working capital management on profit
and liquidity position with special reference to Nagarjuna Herbal Concentrates Ltd Idukki” has
thrown light into financial position of the firm with respect to its working capital. The overall aim
of the study is to analyze the Working capital position of Nagarjuna Herbal Concentrates Ltd by
using financial ratios, schedule of changes in working capital and trend analysis. The net working
capital in 2008-09 to2012-013 indicates there is efficiency in working capital for day to-day
operations. Therefore the net working capital position in Nagarjuna Herbal Concentrates Ltd is
satisfactory throughout the study period.
A study on Working capital management of Nagarjuna Herbal Concentrates Ltd reveals
that, the firm need to improve in proper management of net working capital, but the overall
financial performance in general is good. An innovative approach, combining operational and
financial skills and an all-encompassing view of the company’s operations will help in identifying
and implementing strategies that generate good working capital position in Nagarjuna Herbal
Concentrates Ltd.
BIBILIOGRAPHY & ANNEXURES
BIBLIOGRAPHY
BOOKS
Vijaykumar and A. Venkatachalam, “Working Capital and Profitability – An Empirical
Analysis,”sixth edition The Management Accountant, October 1995 p. 748-750;
John Sagan, “Towards a Theory of Working Capital Management,” The Journal of
Finance, May 1955 pp. 121-129.
Ernest W. Walker, “Towards a Theory of Working Capital,”second edition The
Engineering Economist, winter 1964 pp. 21-35.
Bhalla V.K, Working Capital Management, Ninth Revised Edition, 2008Anmol
Publications Pvt Ltd.pp 432-450
Prasanna Chandra Financial Management Theory and Practice Prasanna Chandra Sixth
Edition Tata Mc Graw Hill Publishing Company.
JOURNALS
1. Pass C.L., Pike R.H: “An overview of working capital management and corporate
financing” (1984).
2. Herzfeld B; “How to Understand Working Capital Management” (1990).
3. Samiloglu F. and Demirgunes K., “The Effect of Working Capital Management on Firm
Profitability: Evidence from Turkey” (2008)
4. Appuhami, Ranjith B A; “The Impact of Firms' Capital Expenditure on Working Capital
Management: An Empirical Study across Industries in Thailand”, (2008)
5. Hardcastle; “Working Capital Management”,(2009).
6. Thachappilly G. Working Capital Management Manages Flow of Funds”,(2009)
7. Beneda, Nancy; Zhang, Yilei, “Working Capital Management, Growth and Performance
of New Public Companies”, Credit & Financial Management Review, (2008)
8. Dubey R, “Working Capital Management-an Effective Tool for Organisational Success”
(2008)
9. McClure B, Working Capital Works” (2007)
10. Gass D, “How To Improve Working Capital Management” (2006)
11. Maynard E. Rafuse, “ Working capital management: an urgent need to refocus”
Management Decision, (1996)
12. Thomas M. Krueger, “An Analysis of Working Capital Management Results Across
Industries” American Journal of Business, (2005)
13. Eljelly; “cash conversion cycle” year (2002.
14. Lazaridis and Tryfonidis, “ cash conversion cycle” year (2004)
15. Raheman and Nasr; “variables of working capital management” year (2004).
16. Garcia-Teruel and Martinez-Solano;”working capital management of SMEs” year 1996.
17. Falope and Ajilore: “utilisation of resources” year 2003
18. KoumaGuy,(2001)“Working capital management in healthcare” [email protected]
Volume 5; page No 76-89
19. Mehmet SEN, Eda ORUC (2005) “Relationship between the efficiency of working capital
management and company size”, [email protected] Volume 2; Pages No 32-42
20. Brealey.R.,(1997) Working capital management Working Capital management concepts
work sheet University of phoenix. Volume 1; Pages No 123-128
REPORTS
Annual report of the company Nagarjuna Herbal Concentrates Limited from the financ ia l
year 2008-2009 to 2012-2013.
WEBSITES
http://www.nagarjuna.com
www.investopedia.com/terms/w/workingcapitalmanagement.asp
www.studymode.com/.../review-of-literature-for-working-capital-management
www.J-Gate plus.com/working capital management.
NAGARJUNA HERBAL CONCENTRATES LIMITED
Kalayanthani PO, Thodupuzha, Kerala, India - 685 588
BALANCE SHEET AS ON 31st MARCH 2009
As at
31.3.2009 (Rs)
As at
31.3.2008
(Rs)
SOURCES OF FUND
Shareholders’ Funds :
Share capital
Share capital Advance
Reserves $ Surplus
Loan Funds
a) Secured Loans
b)Unsecured Loans
Deferred Tax Liability
26480000
0
30217881
59813033
10241000
5450000
26480000
0
25763895
50453067
11474000
5040000
TOTAL 132201914 119210962
APPLICATION OF FUNDS
Fixed Assets :
Gross Block
Less: Depreciation
77774727
35525954
72951902
32772760
Net Block 42248773 40179142
Capital Work in Progress
Investments
Current
Assets,Loans$Advances
a) Inventories
b)Sundry Debtors
c)Cash$ Bank Balance
d)Other Current Assets
e)Loans$ Advances
25918
11916930
58367007
47066018
1984628
105976
1919914
25918
9104000
56618141
34296182
5354196
96145
14185126
Less: Current Liabilities
Provisions
Net Current Assets
126722770
48712477
110549789
40647887
78010293 69901902
TOTAL 132201914 119210962
BALANCE SHEET AS ON 31st MARCH 2010
As at
31.3.2010 (Rs)
As at
31.3.2009 (Rs)
SOURCES OF FUND
Shareholders’ Funds :
Share capital
Reserves $ Surplus
Loan Funds
a) Secured Loans
b)Unsecured Loans
Deferred Tax Liability
26480000
28522954
77842137
10192000
3405000
26480000
30217881
59813033
10241000
5450000
TOTAL 146442091 132201914
APPLICATION OF FUNDS
Fixed Assets :
Gross Block
Less: Depreciation
79249335
38171804
77774727
35525954
Net Block 41077531 42248773
Capital Work in Progress
Investments
Current
Assets,Loans$Advances
a) Inventories
b)Sundry Debtors
c)Cash$ Bank Balance
d)Other Current Assets
e)Loans$ Advances
0
16953930
72201967
56413916
7412543
121941
16948715
25918
11916930
58367007
47066018
1984628
105976
1919914
Less: Current Liabilities
Provisions
a)Liabilities
b)provision
153099083
126722770
57482054
7206399
46159644
2552833
64688453 48712477
Net Current Assets 88410630 78010293
TOTAL 146442091 132201914
BALANCE SHEET AS ON 31st MARCH 2011
As at
31.3.2011 (Rs)
As at
31.3.2010 (Rs)
SOURCES OF FUND
Shareholders’ Funds :
Share capital
Reserves $ Surplus
Loan Funds
a) Secured Loans
b)Unsecured Loans
Deferred Tax Liability
26480000
20927322
89636187
11623000
1080000
26480000
28522954
77842137
10192000
3405000
TOTAL 149746509 146442091
APPLICATION OF FUNDS
Fixed Assets :
Gross Block
Less: Depreciation
80374535
41201025
79249335
38171804
Net Block 39173510 41077531
Investments
Current
Assets,Loans$Advances
a) Inventories
b)Sundry Debtors
c)Cash$ Bank Balance
d)Other Current Assets
e)Loans$ Advances
17903930
69700906
52637084
10109729
65925
20127654
16953930
72201967
56413916
7412543
121941
16948715
Less: Current Liabilities
Provisions
a)Liabilities
b)provision
152641298 153099083
54066794
5905435
57482054
7206399
59972229 64688453
Net Current Assets 92669069 88410630
TOTAL 149746509 146442091
BALANCE SHEET AS ON 31st MARCH 2012
As at
31.3.2012 (Rs)
As at
31.3.2011 (Rs)
SOURCES OF FUND
Shareholders’ Funds :
Share capital
Reserves $ Surplus
Loan Funds
a) Secured Loans
b)Unsecured Loans
Deferred Tax Liability
26480000
23003964
85666296
9363000
512700
26480000
20927322
89636187
11623000
1080000
TOTAL 145025960 149746509
APPLICATION OF FUNDS
Fixed Assets :
Gross Block
Less: Depreciation
81802052
43599657
80374535
41201025
Net Block 38202395 39173510
Investments
Current
Assets,Loans$Advances
a) Inventories
b)Sundry Debtors
c)Cash$ Bank Balance
d)Other Current Assets
e)Loans$ Advances
8258930
78115460
51803016
14021207
30899
11901515
17903930
69700906
52637084
10109729
65925
20127654
Less: Current Liabilities
Provisions
a)Liabilities
b)provision
155872097 152641298
55577021
1730441
54066794
5905435
57307462 59972229
Net Current Assets 98564635 92669069
TOTAL 145025960 149746509
BALANCE SHEET AS ON 31st MARCH 2013
As at
31.3.2013 (Rs)
As at
31.3.2012 (Rs)
SOURCES OF FUND
Shareholders’ Funds :
Share capital
Reserves $ Surplus
Loan Funds
a) Secured Loans
b)Unsecured Loans
Deferred Tax Liability
26480000
27388432
82571540
12947000
3360800
26480000
23003964
85666296
9363000
512700
TOTAL 152747772 145025960
APPLICATION OF FUNDS
Fixed Assets :
Gross Block
Less: Depreciation
87828405
47143910
81802052
43599657
Net Block 40684495 38202395
Investments
Current
Assets,Loans$Advances
a) Inventories
b)Sundry Debtors
c)Cash$ Bank Balance
d)Other Current Assets
e)Loans$ Advances
8558930
80559958
58887402
11103117
206512
11873679
8258930
78115460
51803016
14021207
30899
11901515
Less: Current Liabilities
Provisions
a)Liabilities
b)provision
162630668 155872097
53070623
6055698
55577021
1730441
59126321 57307462
Net Current Assets 103504347 98564635
TOTAL 152747772 145025960
